The commission and bonus culture of financial advisers is under attack by regulators across Europe who want to crack down on sales of incentive-led products and services to consumers.
The European Securities and Markets Authority (ESMA) is following the lead of the Financial Services Authority(FSA) in Britain.
ESMA has outlined the new proposed regime in a consultation paper examining salaries, commissions and bonuses paid to financial advisers – clearly stating that such sales practices will be ‘incompatible’ with the rules laid out in the Markets in Financial Instruments Directive (Mifid) for selling to consumers.
ESMA and the FSA both identify a conflict of interest for sales staff who are offered extra rewards or earnings for selling certain products or services to consumers.
The consultation expressly states that banks and other financial institutions should not structure remuneration for advisers in ways that fall foul of ESMA of Mifid guidelines to prevent staff pushing products that earn them the most money regardless of the consumer’’s interests.
Mis-selling scandals
ESMA chairman Steven Maijoor said: “During the last decade we have seen a number of mis-selling scandals affect the retail investor across Europe, ranging from pensions to mortgages to investment products.
“A key factor identified as a driver for the promotion, recommendation and selling of unsuitable products is the presence of financial incentive schemes for sales staff that do not take account of the clients’ best interests.
“The proposed remuneration guidelines for Mifid investment firms are key to ensuring that the pay and incentive structures for sales staff and their superiors do not create false incentives when selling financial products to retail investors. The consistent application of ESMA’s remuneration guidelines will help strengthen investor protection and achieving the same level of protection for Europe’s retail investors no matter where they invest.”
Conflict of interest
Recently, Martin Wheatley, incoming chief executive of the Financial Conduct Authority, said the regulator taking over from the FSA will monitor sales practices at banks, building societies and investment firms.
He warned the industry could see new rules on incentive schemes for product sales.
The European Commission consultation paper on the Mifid review, explained: “The key element of this framework is the management and the avoidance of conflicts – not just disclosure.
“For instance, it would be very difficult for a firm which creates strong incentives for its sales staff to sell certain products, for example through internal bonus structures, to be able to manage the conflicts of interest thereby created.
“It is unlikely that such a firm could, in this situation, demonstrate compliance with Mifid.”
