“The form taken by certain systems of incentive and remuneration in relation to the sale of investment products may raise potential conflicts of interest among advisers to the disadvantage of the customer,” FMA Executive Directors Helmut Ettl and Kurt Pribil have observed. “With the Circular published today, the Financial Market Authority has established a modus operandi for companies in the provision of investment services to ensure they act with honesty, sincerity and professionalism in the best interests of their customers, and observe rules of conduct.” The main focus of the Circular is to ensure that companies do not create false incentives for their staff who are involved in the sale of securities.
The “FMA Circular on the problem of conflicts of interest in relation to certain systems of remuneration” in the sale of investment products is aimed at credit institutions, investment service providers, insurance undertakings and investment fund management companies, and relates to financial investment services, investment activities and ancillary services. In the Circular, the FMA defines areas for attention in the design of sales incentive systems to manage potential conflicts of interest in accordance with Article 34 ff of the Wertpapieraufsichtsgesetz (WAG 2007; Securities Supervision Act). WAG 2007 provides for a three-stage approach, comprising the identification, avoidance and disclosure of conflicts of interest. First, potential conflicts of interest should be identified as a preventive measure. Second, these identified potential conflicts should be avoided as far as possible. Third, if a conflict of interest is inevitable, despite all measures that have been taken, it must be disclosed to the customer.
All companies must establish in writing, in a formal Policy on Conflicts of Interest, how they deal with potential conflicts of interest in accordance with this three-stage approach. As part of this process, there must be an evaluation of all internal systems of remuneration, payment of commission or other forms of bonus to employees within the company. Performance-related systems of remuneration for employees must be recorded in the Policy in view of the related potential for conflict of interest as per Article 35 par. 2 no. 1 WAG 2007. These include:
- The setting of general sales targets (e.g. turnover, account volumes);
- Promotion of the sale of products from specific providers or in specific categories (e.g. equities, investment funds, bonds);
- Incentives that are intended to force the sale of specific products (such as a particular share).
“It is obvious that an employee who receives additional remuneration for successfully selling a specific investment product will tend to recommend this product to a customer more than another product that provides him with a lower or no variable pay component,” explains FMA Executive Director Pribil. The employee therefore faces a potential conflict and the risk that he or she will not act in the customer’s best interests.
In the case of such systems of remuneration, it is imperative that companies develop procedures and introduce measures to avoid conflicts of interest. The most basic recommendation is that such critical systems of reward are not implemented. However, in practice it can be enough to combine such a system with the introduction of control mechanisms to allow existing models of commission payment to be retained. Nevertheless, it is particularly important that suitable ex post checks are implemented at the very least, such as the introduction of tools to monitor employees about whom complaints are more frequently received from customers, or whose remuneration is heavily dependent on a variable component. In addition, the Circular recommends that such checks be carried out on random samples, according to areas of risk. In general, conflicts of interest in relation to remuneration systems that are particularly open to abuse can also be prevented if the variable component of the employee’s pay only forms a small or limited amount of the total overall salary. Sales targets that reward employees more for the sale of specific, named products than for the sale of other, comparable products represent a conflict of interest that cannot be resolved, however.
“Implementation of this Circular will ensure that suitable measures are put in place to protect customers,” summarised the FMA Executive Directors.
For further information please contact
Klaus Grubelnik (FMA Media Spokesperson)
+43/(0)1/24959-5106
+43/(0676)/882 49 516