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Esma cracks down on investment firm sales incentives

ESMA chair Steven Maijoor: Aims to crack down on misselling

The European Securities and Markets Authority ia launching a crackdown on investment firms’ sales incentive schemes through a set of tough new guidelines published today.

In the guidelines, Esma states firms must have appropriate remuneration policies and practices in place to act in the client’s best interests.

The rules apply to all firms providing investment services under Mifid and impact all client-facing staff, sales force staff or any staff member whose pay is linked to sales such as line managers.

Most UK advisers are not subject to Mifid rules and the RDR means the guidelines should not apply to UK advisers as they are not paid through incentive schemes.

The paper does not reflect absolute rules but detailed guidelines as to how the Mifid rules should be applied by firms.

Esma says firms should not create incentives to benefit the firm or individual ahead of the client and national regulators should clamp down on scheme that do not comply.

The guidelines also state remuneration should not be linked to sales volumes or specific products or be too variable as it can lead staff to focus on the short-term rather than the client’s best interest.

Staff must also be judged on how they comply with regulatory requirements, internal procedures and on the basis of fair client treatment and satisfaction.

Remuneration policies should be simple, approved by senior management and periodically reviewed. They should also be able to identify individuals not acting in clients’ best interest.

Esma chair Steven Maijoor says: “A root problem behind the selling of unsuitable financial products is the presence of financial incentive schemes, including target setting or performance management, that do not take into account the clients’ best interests.

“Esma’s remuneration guidelines reinforce the Mifid provisions in this regard, and if correctly put in place by investment firms, avoid inappropriate incentives from the start.

“Firms should therefore make sure that their remuneration practices take into account conflicts of interest that arise when providing investment services to their clients. Remuneration schemes that encourage bias towards products that are easier, quicker or more profitable to sell, but which are not suitable for the client’s needs, should be eradicated.”

Esma says national regulators have two months to implement the new rules. If national regulators do not respond or apply the guidelines they will be deemed non-compliant and the guidelines would come into force directly after 60 days.



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There is one comment at the moment, we would love to hear your opinion too.

  1. What a load of flatulent tosh. Talk about stating the bleedin’ obvious. If somebody’s paid the same regardless of whether he sells 10 units a month or 30, he’s only going to make the effort to sell 10, isn’t he? But if he’s going to earn twice as much for hitting his target, then he’ll go all out to do so. So no sales organisation can do without incentives for its sales people.

    It’s all about suitability, a criteria that the mass-sales outfits have studiously ignored (and apparently been allowed to ignore) for decades. So they need to beef up their compliance departments and the regulator, on a regular basis, needs to go in and, with a critical eye, not just look at a selection of files but give the compliance officer a good grilling as well if they disagree with the basisi on which certain files have been passed as satisfactory.

    That’s pretty much what members of IFA networks have to submit to on a cross-section of their business transactions and that must surely contribute to the ever-decreasing proportion of all complaints attributable to IFA’s. Why aren’t the banks required to operate in a similar fashion?

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