The European co-operative banks would like to raise their deep concerns about the general tenor of this consultation which is – sometimes – at odds with the MiFID legislation itself as well as existing labour laws in the Member States.
Variable remuneration is an economic necessity
We are fully aware of the fact that remuneration policies and practices can give rise to conflicts of interest.
Nevertheless, in the view of the European co-operative banks, ESMA’s draft guidelines do not take sufficient account of the fact that compensating employees in parts with variable remuneration is a basic economic necessity in successfully managing a company . In particular, the possibility to flexibly design – at least a part of – the employee remuneration is essential from a business perspective to run a company in an economic sensible fashion. The basis of employees’ wages and salaries have to be based on the investment firm’s earnings which are never constant. It is necessary to design remuneration in a way that allows the investment firm to respond to these fluctuating earnings. The correct instrument to achieve this is the variable remuneration. Also from a management standpoint it must be possible for the investment firm to distribute the income generated by its employees in accordance to their respective performance. It does not make any sense to completely detach the employees’ performances (which are the cause for a company’s success or downfall) by providing them all with the same remuneration regardless of their efforts and performances which would not motivate to provide above-average performance and would, in turn, demotivate all employees. Of course, the payment of the variable remuneration should depend on the precondition that the employee complies with the internal organisational measures and procedures the investment firm has implemented in order to meet the MiFID requirements.
Last but certainly not least, the necessity of variable remuneration is also confirmed in the CEBS Guidelines on remuneration Policies and Practices in response to the requirements of the CRD. Accordingly, remunerations serves also the purpose of risk management in investment firms . This aim can only be achieved by introducing a variable remuneration component.
Organisational safeguards to manage conflicts of interest are disregarded
We are of the opinion that the ESMA draft guidelines are not taking appropriate account of the essential organisational and administrative arrangements that have already been put in place by investment firms “designed to prevent conflicts of interests […] from adversely affecting the interests of its clients”. Such arrangement are either of internal nature or are – with respect to labour laws – binding instructions to employees to comply with the internal organisational measures and procedures the investment firm has implemented in order to meet the MiFID-provisions. Furthermore, these arrangements also include the monitoring and regular assessment by the compliance function whether these organisational measures and procedures are still adequate and effective and controls whether employees comply with the above mentioned internal instructions.
The MiFID and the MiFID-Implementing Directive does not simply ignore the existence of conflicts of interest within investment firms by outlawing them, but – in contrast – even acknowledges the existence of conflicts of interest . The legislation stipulates that the investment firm must manage these conflicts of interest in order to prevent them from adversely affecting the interests of its clients . Out of these reasons do we believe that the ESMA draft guidelines – which show a tendency or even require that already the remuneration policies and practices themselves must keep the interests of the clients - are not in line with the MiFID and the MiFID-Implementing Directive and would inappropriately interfere with the MiFID-compliant and already established business operations.
Important ESMA guidelines on compliance are ignored
We have noticed that several parts of the proposed guidelines are also not taking account of the already published ESMA “Guidelines on certain aspects of the MiFID compliance function requirement” which have relevance to various parts of the proposed remuneration guidelines. In view of consistency throughout all ESMA recommendations and to avoid different guideline content of working, would we ask to refer to the compliance guidelines in the ESMA remuneration guidelines.
Curtailing of contractual freedom through proposed ESMA’s draft guidelines at odds with Member States’ civil law
We also have noticed that several proposed guidelines in relation to the remuneration policy are incompatible with the civil law principle of contractual freedom in many Member States. In this context we are genuinely questioning whether ESMA has to power to introduce recommendations that will constitute the basis for all future fixed and variable remuneration policies. Neither MiFID nor its implementing directive contain limits or other restrictions with respect of variable remuneration. The MIFID and its implementing directive requires that the investment firms must identify any conflict of interest and leave it to the investment firms to establish effective measures in order prevent these conflicts of interest from adversely affecting the interests of their clients. This leads us to the conclusion that ESMA does not seem to have the authority to curtail this contractual freedom through their guidelines in such a way that only specific remuneration models are allowed in future . Finally we would like to stress that investment firms can not amend their contractual obligations on its own. For such an amendment, an explicit legal basis would be necessary. Furthermore, such a basis must be sufficient specific and appropriate. But, as already explained above, such a legal basis doesn’t exist.