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26 October 2009

CESR highlights industry practices on inducements rules: "good and poor"

The consultation concerns the MIFiD inducement rules. It raises several issues including proper fees, classification of payments and non-monetary benefits, payments subject to cumulative conditions and experience of firms’ cross-border implementation.

The main points of discussion are under the following five headings:

Classifying payments and non-monetary benefits and setting up an organisation to be compliant: Overall, most investment firms understand the MiFID inducements rules and have taken measures with a view to ensuring compliance. The differences observed in the arrangements and the procedures which firms have implemented to comply with the rules, were in part due to the scale and nature of their business and the degree to which the MiFID inducements rules had impacted their business. Where firms documented their processes, the decisions on admissible payments and non-monetary benefits were based on pre-defined assessment principles and factors, or decisions were taken by specific functions within the firm. The role of the compliance function, with the support of senior management, was generally seen as essential in facilitating effective compliance.
Only a small number of firms (mostly investment firms providing portfolio management services) reported a change in their remuneration structure as a consequence of the rules. Some firms even consider that the rules have enhanced the transparency of the commission structures for clients.
Proper fees: Investment firms gave examples of payments they considered were proper fees under Article 26(c) of the Level 2 Directive. CESR provides a view on some of the payments which are proper fees. These include all fees necessary for the provision of order execution services which, by their nature, cannot give rise to conflicts with the best interests of investment firm clients. All kinds of fees paid by a firm in order to access and operate on a given execution venue should normally be considered as such (under the general category of settlement and exchange fees).
Payments and non-monetary benefits authorised subject to certain cumulative conditions – acting for the best interests of the client and designed to enhance the quality of the service provided to the client: Many of the firms responding to the questionnaire listed specific methods of managing potential conflicts caused by third party payments and non-monetary benefits provided or received by the firm and consider the conflicts of interest policy as a vital tool in ensuring that such payments and benefits do not cause the firm to act contrary to the clients best interests.
A variety of justifications were put forward by investment firms as to why certain payments and non-monetary benefits were designed to enhance the quality of the service to the client. However, some of the responses suggested that firms find it difficult to grasp the ‘designed to’ aspect and focused, instead, on whether the payment ‘enhances’ the quality of the service to the client
Payments and non-monetary benefits authorised subject to certain cumulative conditions – Disclosure: Most investment firms disclose to clients the third-party payments and non-monetary benefits they provide or receive via a summary disclosure. Differences were noted in the degree to which the disclosures provided sufficient information to enable clients to make an informed investment decision. A large majority of firms noted that their clients did not request further information after receiving a summary disclosure.
Experience of firms’ cross-border implementation: The majority of investment firms did not have to adopt different arrangements or procedures across the Member States concerned in order to comply with Article 26 of the Level 2 Directive. The small minority of firms which reported that they had to make changes were mostly internationally active groups operating several subsidiaries across Europe, and tended to develop a uniform group approach to comply with the MiFID inducements rules.
Views are specifically sought from stakeholders on the consultation questions posed in the relevant chapters. The questions are on aspects of the MiFID inducements rules which are being addressed for the first time by CESR.
Deadline for comments is 22 December.

© CESR - Committee of European Securities Regulators

Documents associated with this article

CESR - consultation inducements - MiFID.pdf

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