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20 April 2010

CESR final position on good and poor practices on inducements


According to CESR all fees necessary for the provision of order execution services which cannot give rise to conflicts with the best interests of the investment firm’s clients and all kinds of fees paid by a firm in order to access on a given execution venue should be considered as "proper fees".

CESR has sought in this Feedback Statement (FS) to respond to comments made and points raised in response to its consultation paper (CP) “Inducements: Good and poor practices” (Ref. CESR/09-958). The consultation paper was published on 22 October 2009. This FS covers the same areas as the CP. CESR‟s final policy position on good and poor practices on inducements has been published in parallel to publishing this FS.
 
The main points form CESR final policy positions are under the following five headings:
 
·         Classifying payments and non-monetary benefits and setting up an organisation to be compliant: Most investment firms understood the MiFID inducements rules and have taken measures with a view to ensuring compliance. The differences observed in the arrangements and procedures firms set up 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 predefined assessment principles/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 the structure of the payments they make/receive as a consequence of the rules. Some firms also considered the rules had enhanced transparency to clients of the commission structures.
 
·         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 the investment firm‟s 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 considered 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 client‟s 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 on whether the payment „enhances the quality of the service to the client‟. In addition, some firms considered the „designed to enhance‟ criterion as not separate from the duty to act in the best interests of the client.
 
·         Payments and non-monetary benefits authorised subject to certain cumulative conditions – Disclosure: Most investment firms disclose to clients 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 any different arrangements or procedures across the Member States concerned to comply with Article 26 of the Level 2 Directive. The small minority of firms that 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.
 


© CESR - Committee of European Securities Regulators

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