(June 11, 2013) — Earning a bonus for selling a specific product, portfolio churning to create extra fees, and basing remuneration on how much is sold to a client are to be outlawed under new European regulations issued today.
The European Securities and Markets Authority (ESMA) has released guidelines on how fund management firms should remunerate their staff, and highlighted bad practice it will not tolerate.
“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,” Steven Maijoor, ESMA chair, said. “ESMA’s remuneration guidelines reinforce the Markets in Financial Instruments Directive (MiFID) provisions in this regard, and if correctly put in place by investment firms, avoid inappropriate incentives from the start.”
The guidelines-illustrated over 39 bullet points-warn investment firms that practices that earn large wage packets and bonuses to the detriment of a client’s portfolio are to cease within 60 days, or ESMA wants to know why.
The guidelines assert that all action taken by staff who have interaction with, or whose work directly impacts the outcome for clients, should be incentivised with their best interest in mind. The statement uses the basis of MiFID to alert fund managers to their duty of care, which is implicit in the directive and should be transported to the issue of remuneration.
“Remuneration policies and practices should be designed in such a way so as not to create incentives that may lead relevant persons to favour their own interest, or the firm’s interests (for example in the case…where a firm promotes the sale of products that are more lucrative for it), to the potential detriment of clients,” the document says.
“Furthermore, where firms’ remuneration policies and practices link remuneration directly to the sale of specific financial instruments or of a specific category of financial instrument, it is unlikely that such firms could, in this situation, demonstrate compliance with MiFID conduct of business or conflict of interest requirements.”
ESMA will no longer allow remuneration to be based purely on quantitative measures, but qualitative considerations will have to be made, including how well a product sold to a client has helped them achieve their goal or a satisfactory assessment of how fitting a product was for their portfolio.
The organisation calls on “competent authorities” in European nations to crack-down and enforce these guidelines on the companies within their jurisdiction and decide on the “appropriate action” to take should they find any failing to comply.
“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,” Maijoor concluded.
For the full ESMA guideline document, click here.
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