Financial Services Advisory

Guidelines on certain aspects of the MiFID II compliance function requirements

Dwayne Price
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On June 5th, the European Securities and Markets Authority (‘ESMA’) published final guidelines on the MiFID II compliance function. The revised Guidelines replace the ESMA guidelines on the same topic issued in 2012. Due to MiFID II reinforcing the existing MiFID I requirements relating to the compliance function, rather than introducing a completely different regime, ESMA has chosen to build upon the text of the 2012 guidelines rather than replace entirely. The guidelines have been substantially confirmed albeit clarified and refined where necessary, while also taking into account new requirements under MiFID II and the results of supervisory activities conducted by national competent authorities (NCAs).

The guidelines apply from two months after publication on ESMA's website in all EU official languages, this being from June 6th. It is important to note that the publication of the translations of the Guidelines will trigger a two-month period during which NCAs must notify ESMA whether they comply or intend to comply with the guidelines – it is expected that the Central Bank of Ireland will comply with these guidelines, as in 2012.

The guidelines are addressed to:

  • all MiFID firms;
  • investment firms and credit institutions selling or advising clients in relation to structured deposits; and,
  • UCITS management companies and external Alternative Investment Fund Managers (AIFMs) when providing certain investment services and activities in accordance with the UCITS Directive and the AIFMD.

What is covered under the proposed amendments?

In the section below, we outline the three key impacts of the revised guidelines. These three key impacts provide increasing prescriptions for impacted firms which will need to be addressed going forward. The three main changes identified are:

  1. Product Governance Requirements
  2. Complaints Management
  3. Remuneration Policy

1. Product Governance Requirements

Compliance functions are now required to play an active role in the development of product governance policies and procedures, providing compliance-based knowledge regarding all strategic decisions or new business models.

Mandatory compliance reports under MiFID II must now contain specific details with regards to firm’s product governance arrangements and the involvement of compliance in this area. The required details include:

  • the role of compliance in monitoring and reviewing the firms’ product governance policies and procedures; and,
  • compliance function findings related to product governance policies and procedures and the financial instruments manufactured and/or distributed by the firm.

Taking into account the proportionality principle, the information provided for simpler, more common products can be less in-depth, whereas products characterised by complexity should be described in more detail.

Compliance functions must also provide advice and assistance on an ongoing basis with regards to product governance policies and procedures, for example, staff and management training.

The obligations on MiFID compliance functions with regard to product governance have significantly increased – this will require firms to examine the current role of compliance in this area and set out a plan for their further involvement as required.

2. Complaints Management

The guidelines outline the preference, subject to the proportionality principle, for separation of the compliance function and the complaints management function. Where there is an overlap between the two functions, potential and actual conflicts of interest must be carefully assessed, reported and managed.

Again, the guidance provided on compliance’s involvement in complaints management will require firms to examine their compliance function’s level of involvement in this area and set out a plan for their future involvement as required e.g. if there is crossover between compliance and complaints management, how are potential conflicts of interest dealt with?

3. Remuneration Policy

Compliance functions are now required to play an active role in the development of the firm’s remuneration policy, providing compliance-based knowledge regarding the MiFID remuneration obligations.

Compliance functions must also provide advice and assistance on an ongoing basis with regards to the remuneration policy, for example, answering queries from relevant staff about the remuneration obligations.

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Why Grant Thornton?

Grant Thornton’s Financial Services Risk and Advisory teams have supported a number of firms with understanding, preparing for and implementing prescriptions regarding internal governance in the last decade. These include engagements focused on reviewing the remuneration policies of firms, along with assessments of the structure and performance of compliance functions. In particular, our prudential risk experts have extensive knowledge of the relevant legislation and guidance and the challenges these pose to your firm.

Our experts can help your firm assess its regulatory requirements arising from the revised MiFID II compliance function guidelines and advise on methods to ensure full compliance balanced with your business needs.