Compliance function
European Union Electricity Market Glossary

 


 

 

Article 16(2) of MiFID II requires investment firms to establish adequate policies and procedures sufficient to ensure compliance of the firm with its obligations under the Directive.

 

It is interesting to what extent advisory functions may be performed by compliance officers. On the face of it, it seems logical to engage compliance officers in the very core of the business of the MiFID-regulated firm, in the development of new financial products, etc.

 

Not doing this would mean the scarce human resources are not effectively allocated.

 

However, the EU financial regulator's stance may raise some doubts. The Paris-based European Securities and Markets Authority (ESMA) in its Guidelines on certain aspects of the MiFID compliance function requirements of 28 September 2012 (ESMA/2012/388) adopted under the empowerment of Article 16(12) of MiFID said: "Compliance staff should generally not be involved in the activities they monitor".

 

The above rule, expressly stated by ESMA in General Guideline 9, mirrors the general indication that the boundaries between the management and supervisory functions shouldn't be blurred.

 

How to resolve this conflict?

 

The said ESMA's Guidelines, although being the source of the problem, offers, however, some help.

 

General Guideline 4 resolves the contradiction, and, in parallel, delineates the boundaries for the cooperation between the compliance and the operative units of the investment firm.

 

According to the said Guideline 4, compliance personnel is allowed to fulfil its advisory responsibilities, including:

 

-  to provide assistance for the other staff of the firm (even on day-to-day basis), 

 

- be available to answer questions arising out of daily business activity,

 

- to participate in the establishment of new policies and procedures within the investment firm,

 

- to provide support for staff training.

 

Further, in-depth reading of the said ESMA's Guidelines reveals even more far-reaching examples of the allowable cooperation of the operative and compliance units of the investment firm.

 

Such cooperation is even mandatory in numerous instances.

 

Guidelines say, for example that the investment firms "should ensure that the compliance function is involved in the development of the relevant policies and procedures within the investment firm in the area of investment services, activities and ancillary services."

 

In this context, the compliance function should be enabled, for example, to provide compliance expertise and advice to business units about all strategic decisions or new business models, or about the launch of a new advertising strategy in the area of investment services and activities.


Investment firms should ensure that the compliance function is involved in all significant modifications of the organisation of the investment firm in the area of investment services, activities and ancillary services.

 

This includes the decision-making process when new business lines or new financial products are being approved.

 

Further, the compliance function should be given the right to participate in the approval process for financial instruments to be taken up in the distribution process.

 

Investment firms should ensure that the compliance function is involved in all material non-routine correspondence with competent authorities in the area of investment services and activities.

 

The ESMA's Guidelines resolve all remaining ambiguities mandating that senior management should "encourage business units to consult with the compliance function regarding their operations."

 

It is moreover, noteworthy, that if the compliance function's advice is not followed, the compliance function should document this accordingly and present it in its compliance reports.

 

 

 

Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

Article 22
Compliance
(Article 16(2) of Directive 2014/65/EU)

 

1.Investment firms shall establish, implement and maintain adequate policies and procedures designed to detect any risk of failure by the firm to comply with its obligations under Directive 2014/65/EU, as well as the associated risks, and put in place adequate measures and procedures designed to minimise such risk and to enable the competent authorities to exercise their powers effectively under that Directive.

 

Investment firms shall take into account the nature, scale and complexity of the business of the firm, and the nature and range of investment services and activities undertaken in the course of that business.

 

2.Investment firms shall establish and maintain a permanent and effective compliance function which operates independently and which has the following responsibilities:

 

(a) to monitor on a permanent basis and to assess, on a regular basis, the adequacy and effectiveness of the measures, policies and procedures put in place in accordance with the first subparagraph of paragraph 1, and the actions taken to address any deficiencies in the firm's compliance with its obligations;

 

(b) to advise and assist the relevant persons responsible for carrying out investment services and activities to comply with the firm's obligations under Directive 2014/65/EU; 

 

c) to report to the management body, on at least an annual basis, on the implementation and effectiveness of the overall control environment for investment services and activities, on the risks that have been identified and on the complaints-handling reporting as well as remedies undertaken or to be undertaken;

 

(d) to monitor the operations of the complaints-handling process and consider complaints as a source of relevant information in the context of its general monitoring responsibilities.

 

In order to comply with points (a) and (b) of this paragraph, the compliance function shall conduct an assessment on the basis of which it shall establish a risk-based monitoring programme that takes into consideration all areas of the investment firm's investment services, activities and any relevant ancillary services, including relevant information gathered in relation to the monitoring of complaints handling. The monitoring programme shall establish priorities determined by the compliance risk assessment ensuring that compliance risk is comprehensively monitored.

 

3. In order to enable the compliance function referred to in paragraph 2 to discharge its responsibilities properly and independently, investment firms shall ensure that the following conditions are satisfied:

 

(a) the compliance function has the necessary authority, resources, expertise and access to all relevant information; (b) a compliance officer is appointed and replaced by the management body and is responsible for the compliance function and for any reporting as to compliance required by Directive 2014/65/EU and Article 25(2) of this Regulation;

 

(c) the compliance function reports on an ad-hoc basis directly to the management body where it detects a significant risk of failure by the firm to comply with its obligations under Directive 2014/65/EU;

 

(d) the relevant persons involved in the compliance function are not involved in the performance of services or activities they monitor;

 

(e) the method of determining the remuneration of the relevant persons involved in the compliance function does not compromise their objectivity and is not likely to do so.

 

4. An investment firm shall not be required to comply with point (d) or point (e) of paragraph 3 where it is able to demonstrate that in view of the nature, scale and complexity of its business, and the nature and range of investment services and activities, the requirements under point (d) or (e) are not proportionate and that its compliance function continues to be effective. In that case, the investment firm shall assess whether the effectiveness of the compliance function is compromised. The assessment shall be reviewed on a regular basis.

 

Article 26(3)

 

Investment firms shall establish a complaints management function responsible for the investigation of complaints. This function may be carried out by the compliance function.

 

Article 26(7)

 

Investment firms' compliance function shall analyse complaints and complaints-handling data to ensure that they identify and address any risks or issues.

 

Article 27(3)

 

The management body of the investment firm shall approve, after taking advice from the compliance function, the firm's remuneration policy. The senior management of the investment firm shall be responsible for the day-to-day implementation of the remuneration policy and the monitoring of compliance risks related to the policy.

 

Recital 37

 

The fact that risk management and compliance functions are performed by the same person does not necessarily jeopardise the independent functioning of each function. The conditions that persons involved in the compliance function should not also be involved in the performance of the functions that they monitor, and that the method of determining the remuneration of such persons should not be likely to compromise their objectivity, may not be proportionate in the case of small investment firms. However, they would only be disproportionate for larger firms in exceptional circumstances.

 

Recital 38

 

Clients or potential clients should be enabled to express their dissatisfaction with investment services provided by investment firms in the interests of investor protection as well as strengthening investment firms' compliance with their obligations. Clients' or potential clients' complaints should be handled effectively and in an independent manner by a complaints management function. In line with the principle of proportionality, that function could be carried out by the compliance function.

 

 

 

 

Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

Article 6
(Article 13(2) of Directive 2004/39/EC)
Compliance


1.   Member States shall ensure that investment firms establish, implement and maintain adequate policies and procedures designed to detect any risk of failure by the firm to comply with its obligations under Directive 2004/39/EC, as well as the associated risks, and put in place adequate measures and procedures designed to minimise such risk and to enable the competent authorities to exercise their powers effectively under that Directive.


Member States shall ensure that, for those purposes, investment firms take into account the nature, scale and complexity of the business of the firm, and the nature and range of investment services and activities undertaken in the course of that business.


2.   Member States shall require investment firms to establish and maintain a permanent and effective compliance function which operates independently and which has the following responsibilities:


(a) to monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures and procedures put in place in accordance with the first subparagraph of paragraph 1, and the actions taken to address any deficiencies in the firm's compliance with its obligations;


(b) to advise and assist the relevant persons responsible for carrying out investment services and activities to comply with the firm's obligations under Directive 2004/39/EC.


3.   In order to enable the compliance function to discharge its responsibilities properly and independently, Member States shall require investment firms to ensure that the following conditions are satisfied:


(a) the compliance function must have the necessary authority, resources, expertise and access to all relevant information;


(b) a compliance officer must be appointed and must be responsible for the compliance function and for any reporting as to compliance required by Article 9(2);


(c) the relevant persons involved in the compliance function must not be involved in the performance of services or activities they monitor;


(d) the method of determining the remuneration of the relevant persons involved in the compliance function must not compromise their objectivity and must not be likely to do so.


However, an investment firm shall not be required to comply with point (c) or point (d) if it is able to demonstrate that in view of the nature, scale and complexity of its business, and the nature and range of investment services and activities, the requirement under that point is not proportionate and that its compliance function continues to be effective.

 

 

 

 

 

Guidelines on certain aspects of the MiFID compliance function requirements, 28 September 2012, ESMA/2012/388, p. 28, 29

 

33. Investment firms should ensure that the compliance function fulfils its advisory responsibilities including: providing support for staff training; providing day-to-day assistance for staff and participating in the establishment of new policies and procedures within the investment firm.

 

...

 

39. Compliance staff should also provide assistance to staff from the operative units in their day-to-day business and be available to answer questions arising out of daily business activity.


40. Investment firms should ensure that the compliance function is involved in the development of the relevant policies and procedures within the investment firm in the area of investment services, activities and ancillary services. In this context, the compliance function should be enabled, for example, to provide compliance expertise and advice to business units about all strategic decisions or new business models, or about the launch of a new advertising strategy in the area of investment services and activities. If the compliance function's advice is not followed, the compliance function should document this accordingly and present it in its compliance reports.


41. Investment firms should ensure that the compliance function is involved in all significant modifications of the organisation of the investment firm in the area of investment services, activities and ancillary services. This includes the decision-making process when new business lines or new financial products are being approved. In this context, the compliance function should be given the right to participate in the approval process for financial instruments to be taken up in the distribution process. Senior management should therefore encourage business units to consult with the compliance function regarding their operations.


42. Investment firms should ensure that the compliance function is involved in all material non-routine correspondence with competent authorities in the area of investment services and activities.

 

 

 

 

 

ESMA's technical advice:

 

The proposed technical advice builds on the existing compliance requirements, further specified in MiFID Implementing Directive and on the principles set out in the ESMA 2012 compliance guidelines. ESMA advises to introduce a few modifications aimed at strengthening the monitoring and reporting responsibilities of the compliance function:


- reporting to the management body on the implementation and effectiveness of the control environment, identified risks and on the complaint-handling reporting as well as remedies;


- monitoring the operations of the complaints-handling process;


- conducting an assessment to establish a risk-based monitoring programme;


- direct reporting to the management body whenever the firm has detected a significant risk of failure to comply with its obligations under MiFID II.

 

Assessment of IA need:

 

ESMA noted that all national competent authorities have declared compliance with the compliance guidelines and therefore the suggested amendments should not add an additional burden for investment firms. The Commission therefore sees no need to carry out a further impact assessment with regard to this issue.

  

Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 76, 77

 

 

 

 

 

 

 

IMG 0744

    Documentation    



 

 

 

 

Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, Article 22

 

Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, Article 6

 

Guidelines on certain aspects of the MiFID compliance function requirements, 28 September 2012, ESMA/2012/388

 

Final report, Guidelines on certain aspects of the MiFID compliance function requirements, 06 July 2012, ESMA/2012/388

 

Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 76, 77

 

 

 

 

 

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    Links    

 

 

 

 

Technology to elevate—not replace—compliance professionals

 

 

 

 

 

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Last Updated on Thursday, 17 August 2017 23:05
 

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