The consultative guidance on Incentives issued by the FSA (see separate article in the Regulatory Roundup) was followed a couple of weeks later by the publication by ESMA of a consultation paper on ‘Guidelines on remuneration policies and practices (MiFID)’.
Note that this is not the same as the Remuneration Code which reflected in SYSC 19A. The latter was mainly driven from a prudential perspective (CRD) whilst what is proposed in the ESMA paper is based upon conflicts of interest (MiFID) that arise in the provision of services to a firm’s clients. Fortunately ESMA considers that the principles of CRD should be read across to MiFID in order to address conduct of business risks in a consistent manner.
Where there may be divergence is in the staff that are affected. Remuneration Code staff are defined in SYSC 19A.3.4 (risk takers, senior management etc.). The new guidelines could include sales force staff, client-facing front-line staff and even line managers; basically anyone who could be incentivised to act against the best interests of their clients because of remuneration structures.
Although we are told that the guidelines are targeted at sales activities with retail clients, firms are reminded that MiFID Article 13 (organisational requirements) and MiFID Article 16 (conflicts of interest) apply to firms regardless of the categorisation of the clients.
Scattered through the paper are various examples of good and poor practice, although if you turn to Annex V you will find in one place the guidelines and examples. It will be noted that the compliance function should be involved in the design process of remuneration practices before they are applied as well as verifying that the firm complies with the MiFID conduct of business and conflicts of interest requirements.
Where services are provided to a firm under an outsourcing arrangement or by way of tied agents then the remuneration provided by the firm to the third parties will also be regarded as remuneration for the purposes of the guidance. Firms will need to ensure that the third parties also have effective remuneration policies and practices in place.
Comments by 7 December are invited; ESMA expects to publish a final report and guidelines by Q2 2013. ESMA will consider the need to revise any proposals on MiFID 2 implementation (see Regulatory Roundup 36).
Regulatory Roundup 42 contains a link to the ESMA consultation paper on ‘Guidelines on sound remuneration policies under the AIFMD”.