Compliance

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E.S.M.A. provides guidance on the compliance function under M.I.F.I.D. II

The European Securities and Markets Authority (E.S.M.A.), the EU’s securities markets regulator, has published the final guidelines on the M.I.F.I.D. II, compliance function. 

These guidelines replace the E.S.M.A. guidelines on the same topic issued in 2012 and include updates that enhance clarity, required continuous implementation, and supervision, of the new M.I.F.I.D II. 

Strong focus on the skills, knowledge, expertise, and authority of the compliance function requirements, are newly introduced.

Ultimate, the guidance reinvigorates the idea that compliance function must establish a risk-based monitoring programme based on this compliance risk assessment to determine its priorities and the focus of the monitoring, advisory and assistance activities.

The Competent authorities of any single states to which these guidelines apply should notify E.S.M.A. whether they intend to: 

• Comply
• Do not comply 
• Intend to comply
• Do not comply and not intend to (in this case reason why)

Those guidelines are made in accordance with article 16 of E.S.M.A. and are not in contrast with any prescription introduces by a Member State in their territories. 

Firms, instead, do not require to report whether they comply with these guidelines, but on the 5 August 2020 firm should comply with these guidelines if their competent authorities haven’t notified E.S.M.A. within two months of date about a different intention.

Subjects to the guidelines are:

Investment firms

• Investment services 
• Investment activities 
• Advising clients on structure deposit

Credit institutions

• Investment services 
• Investment activities 
• Advising clients on structure deposit

U.C.I.T.S. management companies

• Investment advice concerning one or more of the instruments listed in Annex I, Section C to Directive 2004/39/EC
• safekeeping and administration in relation to units of collective investment undertakings
• alternative investment fund managers (A.I.F.M.s)

Those guidelines are made to comply within the Legislative normative below: 

• AIFMD
• CRD
• CRR
• ESMA Regulation 
• MIFID I
• MIFID II
• MIFID II Delegated Regulation 
• MIFID II Delegated Directive 
• UCITS Directive 
• AIFMD 

The main purpose of these guidelines is to help compliance function to became: 

•  consistent 
• efficient 
• effective 

E.S.F.S. will maintain is supervisory function to ensure that all the firm subject to the guidelines adopt a: 

• common 
• uniform  
• consistent 

approach applying the M.I.F.I.D. II, enhancing the value of existing standards.

The Guidelines are devised in 12 groups, each one describes an aspect of the compliance function and suggest the best course of actions: 

1. Guideline on the compliance risk assessment

2. Guideline on Monitoring obligations of the compliance function 

3. Guideline on the reporting obligations of the compliance function

4. Guideline on the advisory and assistance obligations of the compliance function

5. Guideline on the organisational requirements of the compliance function

6. Guideline on the skills, knowledge, expertise, and authority of the compliance function

7. Guideline on the permanence of the compliance function 

8. Guideline on the independence of the compliance function

9. Guideline regarding the proportionality about the effectiveness of the compliance function

10. Guideline on combining the compliance function with other internal control functions

11. Guideline on outsourcing of the compliance function

12. Guideline on the review of the compliance function by competent authorities.

In conclusion, apart of guideline number 6, that stress out the importance of having a compliance department highly skilled, there are no news on the orison. 

However, the original guidance resume what is consider best practice in the market in 2020 and offer a secure reference to organise and implement the compliance department. 

For what concern the UK market were most of the international firm are based, those guidance represent already the steps to ensure that all the requirements indicate on the M.I.F.I.D. II were applied, and most of the compliance department have been organised accordingly, since January 2018.

This is our gist, but we strongly suggest reading the original documentation for its entire.