On 3 January 2018, the Markets in Financial Instruments Directive II (MiFID II) was implemented into UK national law, replacing MiFID I.
MiFID II is wide-reaching, applying to sales staff and advisers in investment firms. In particular, it requires firms not only to ensure that incentives do not encourage mis-selling but also to remunerate and assess the performance of all sales staff in a way that ensures they act in the best interests of clients.
Existing Remuneration Codes are largely aimed at ensuring the firm’s remuneration policies promote effective risk management, with individual requirements focused on Material Risk Takers, and the Financial Conduct Authority expects financial services firms to remain bound by any relevant Code.
However, MiFID II means a significant shift in approach to remuneration governance, performance assessment and remuneration structure for a much larger population of staff. Firms may already have some policies in place to help ensure sales staff address customer needs appropriately – but might not have applied these consistently across all sales teams.
Key steps to help investment firms prepare for the remuneration requirements of MiFID II
Most of our clients are still getting to grips with what implementing the wide-reaching remuneration requirements in MiFID II will involve. Example key actions include:
- Defining the culture and reward principles to set the ‘tone from the top’;
- Reviewing the approach to performance management and recognition, as well as updating remuneration principles and policy, to ensure they all reinforce desired culture and behaviour; and
- Then establishing effective governance and internal processes that underpin ongoing implementation and incorporate the views of HR, Risk, Compliance and the business as a whole.
Performance appraisal and reward structures at investment firms and retail banks are evolving
Reward structures at investment firms are already shifting to focus on more holistic views of performance. A key trend observed over recent years is a transition from commission plans with significant linkage to sales and revenue targets to discretionary assessments of performance that consider a scorecard of performance measures or indicators and behaviours. We are also beginning to see more unique models, e.g. involving a flat share of a bonus pool or no variable pay at all. The premise is that revenue and sales performance will follow, and such performance will be more sustainable.
This direction of travel reflects the development of sales incentives in retail banking as a result of the Treating Customers Fairly (TCF) initiative, which was launched in 2006. Similar to MiFID II, TCF is aimed at mitigating risks to customers in retail services by improving information flow and minimising the sale of unsuitable products.
Rewards in retail banking have developed significantly over recent years, with a stark shift away from simply ensuring compliance with regulator guidance. This journey has not been without key learnings along the way. Current areas of progressive change include:
- Focusing the line manager role holistically on coaching and developing employees;
- Centring performance assessments on development, not on past performance;
- Re-branding performance ratings or removing them altogether;
- Using continuous feedback processes; and
- Introducing a revamped suite of line manager tools.
Whilst it remains early days on MiFID II implementation, what is apparent is that changes to variable reward should be the last step. Setting reward and talent principles that encourage appropriate conduct, reviewing employee recognition and development, and considering the right approach to leadership development should all be a precursor. The regulator will certainly want to see progress against MiFID II requirements, but will also want to ensure the desired behaviours are being promoted throughout.
If you would like to discuss further what MiFID II might mean for you, or any other reward or regulatory issues, please contact us via the form below and we will put you in touch with one of our Financial Services Reward and Regulation Client Team.