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Compliance

MiFID II Series: Remuneration and performance management of sales staff

Posted on 15 Mar 2017

On 3 January 2018, MiFID II will be implemented into UK national law replacing the Directive 2004/39/EC (MiFID I). In preparation for the implementation, Laven Partners will publish a series of newsletters entitled ‘MiFID II Series’, to help our clients and friends navigate the regulation and assess the impacts it will bring.

The following newsletter seeks to examine MiFID II’s requirement on firms to have in place remuneration policies and procedures in order to ensure that staff are not just incentivised to sell products but act in the best interests of clients.

MiFID firms will already be aware of their obligations regarding the European remuneration codes, as firms are subject to the Capital Requirements Directive (CRD). The FCA has extensive rules regarding this depending on the type of firm (SYSC 19A – 19E). There will be much overlap between the different remuneration rules found in the EU laws such as CRD IV and the AIFMD, to which MiFID II will be no exception. The focal point for MiFID II’s remuneration requirements as set out in article 24(10) and MiFIR (article 27) will be on sales staff, that is persons who would be “involved in the provision of investment and/or ancillary services”.

Who will be caught by this?

The FCA proposes to implement the directive’s remuneration standards by making these requirements applicable to sales staff and advisers who work for:

  • common platform firms (which include MiFID investment firms but exclude collective portfolio management investment firms);
  • article 3 (MiFID exempt) firms; and
  • branches of third-country firms (but only where their activities are carried on from an establishment in the UK).

ESMA has provided guidance as to the type of employees which the remuneration rules will apply to. These will be individuals who “have a material impact on the service provided and/or corporate behaviour of the firm” and are defined as ‘relevant persons’ in the guidance. Such persons will include:

  • client-facing front-office staff;
  • sales force staff (e.g. line managers);
  • financial analysts (whose marketing material may be used by sales staff to induce clients to make investment decisions);
  • persons involved with complaints handing, claims processing, client retention, product design and development; and
  • tied agents.

How will it be implemented?

ESMA Guidance

ESMA has published technical guidance with regards to the implementation of the remuneration requirements, which are based on its previous published guidelines (MiFID I (Remuneration Guidelines)). ESMA notes that whereas remuneration issues were not specifically targeted by MiFID I, they are now and have become more prominent within MiFID II. The purpose of such rules is set out in article 9(3)(c) of MiFID II in which the aim of remuneration policies is to “encourage responsible business conduct, fair treatment of clients as well as avoiding conflicts of interest in the relationships with clients”.

MiFID II highlights the importance of managing conflicts of interest, such as the firm’s own remuneration and incentive structures and the client’s best interests. The guidance is principle-based and is not prescriptive in nature, therefore allowing a broader interpretation of the rules. The most notable rule appears under article 24(10), which states that firms which are providing investment services to clients are effectively banned from paying remuneration directly linked to sales, taking a strong approach with regards to investor protection and the protection of client interests.

Some of the main points which ESMA touches on in its technical guidance are:

  • Incentives are not merely limited to financial remuneration; benefits and career progression are examples of non-financial remuneration which may generate a conflict of interest where there is a possibility the employee may not be acting in the best interests of a client.
  • The firm’s remuneration policy is to be approved by senior management of the firm after taking advice from the compliance function.
  • Implementation of the remuneration policy and monitoring of the compliance risks involved falls under the responsibility of senior management.
  • Performance criteria should be developed to encourage relevant persons to act in the best interests of clients.
  • Variable remuneration must be assessed on qualitative criteria e.g. customer satisfaction and not purely on quantitative data e.g. volume of sales or meeting new client targets.
FCA enforcement

The FCA has plans to introduce a new section in its Handbook (SYSC 19F) which will cover remuneration and performance management of sales staff. The regulator has published a combination of papers including guidance (July 2015) and a discussion paper (March 2015), feedback to which will be incorporated into the new rules.

In its consultation paper (July 2016), the FCA stressed that its implementation of the new remuneration rules “do not propose cross-cutting standards applicable to firms regulated under other EU directives”. As such, the only firms within the scope of these new rules should be as highlighted above. This does not mean that those firms, who do not fall within the above categories, are completely let off the hook. Firms should always be aware of the changing regulatory climate and that potentially part of the thinking behind the FCA’s decision not to cross-cut standards is due to the arrival of additional EU remuneration initiatives resulting in more guidelines of a similar nature being published. These new EU-wide rules will probably cover a wide range of firms including those that have not been caught by the MiFID II requirements.

Impact on firms and next steps

In order for firms to prepare for the upcoming implementation of the directive with regards to remuneration standards, firms will need to ensure that they have established sufficient policies and safeguards for their clients. Part of this will include adopting internal procedures to make sure that staff are not incentivised to recommend certain products which would be disadvantageous for the client. The premise of these requirements is linked with the client’s best interests and protects the client.

As the FCA already has in place rather extensive remuneration rules, the addition of another as a result of MiFID, will mean that many firms should have adequate policies in place. Nevertheless, firms are expected to review and update their current processes, where appropriate.

What to do now?

With only a few months to go, any MiFID firm should:

  1. appoint a team at senior management level to scope the application of the new remuneration rules;
  2. amend policies and procedures with the help of compliance;
  3. put in place reviews of the roles of relevant staff so that they adapt to the new rules; and
  4. maintain proper training so that staff act in accordance with the new rules.

If you are reviewing policies or establishing processes in your firm ahead of MiFID II, we may be able to help you. We also have automated software-driven solutions for the MiFID II directive that relate to non-financial reporting, compliance processes, client categorisation and record keeping.

Find out more about our Compliance services here.

Call our London office:  +44 (0)20 7838 0010  Email:  info@lavenpartners.com