Community
The European Securities and Markets Authority (ESMA) is turning up the heat on national regulators to enforce and monitor MiFID conduct of business rules, where Article 37 of the MiFID Implementing Directive aim to ensure that firms 1) sell only suitable products to their clients and 2) feel comfortable that clients can afford them and understand the associated risks.
The latest example is ESMA opinion 2014/146, which addresses investor protection measures for the sale of complex products to retail customers. ESMA defines complex products as any contract that is a derivative, contains more than one leg, is priced based on a non-mainstream index, or has barriers to exit. Such a broad definition means that the investor protection measures will affect a large number of brokers across Europe.
Defining investor protection According to ESMA, firms should:
Demonstrating compliance
To adhere to investor protection guidelines, a firm’s compliance function should take a risk-based approach to its monitoring activity. When the regulator comes knocking, the firm must have a documented audit trail that explains why and how the regulation is or is not relevant to its business. The firm should also be able to show how it will ensure enforcement of the regulation.
How do firms demonstrate that? They would need to dedicate a significant number of people to keep up with paper trails, track customer on-boarding processes and ensure that suitability and appropriateness checks are in place and actually used across its sales force. If the firm is providing advice, then it must also ensure that the given advice is suitable and that resulting transactions are adequately monitored. As if that were not enough, the firm must also follow up on exceptions and potential misconduct among the sales force—a daunting task, even if the sales force is small.
With a set of configurable and automated checks and controls, however, the compliance team could focus its efforts on managing and investigating flagged irregularities and outright rule violations. It could start spotting patterns over time and across groups or entities of customers and sales representatives instead of churning through and managing daunting processes of data collection and analysis. The system can do this for them.
Such a system would be tightly integrated with the firm’s order management and execution software as well as on-boarding processes, and keep track of sales activity and advice. With this in place, the system will analyze and scrutinize every piece of recorded advice, client on-boarding and each and every individual client transaction, as well as analyze accumulated positions across a client’s accounts. The system will create alerts whenever irregular behavior or outright rule breaches are detected, or if potential misselling is spotted.
Given the trend of long term increasing focus on conduct and ensuring suitability, it should be an easy decision for a serious firm that is providing trading access and perhaps advice to retail clients to implement a strong, cost-effective system with associated compliance processes.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Alex Kreger Founder and CEO at UXDA Financial UX Design
14 July
Prakash Bhudia HOD – Product & Growth at Deriv
11 July
Srbuhi Avetisyan Marketing and Communications Manager at Owner.One
09 July
Parminder Saini CEO at Triple Minds
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