September 17, 2012 / 10:31 AM / 5 years ago

EU markets watchdog in mis-selling crackdown

LONDON, Sept 17 (Reuters) - Banks and investment firms have until the second quarter of next year to scrap pay incentives that could encourage the mis-selling of financial products, European Union regulators said.

The draft plan marked a widening remit for the EU’s securities watchdog as it pushes into investor protection territory, traditionally a preserve of national supervisors.

Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), said on Monday there had been a number of mis-selling scandals hitting retail investors across the region in the past decade, from pensions to mortgages, and a more consistent approach was needed to investor protection.

“A key factor identified as a driver for the promotion, recommendation and selling of unsuitable products is the presence of financial incentive schemes for sales staff that do not take account of the clients’ best interests,” Maijoor said.

“The consistent application of ESMA’s remuneration guidelines will help strengthen investor protection and achieving the same level of protection for Europe’s retail investors no matter where they invest.”

The ESMA draft guidelines, out for public consultation until December, flesh out basic requirements in an EU securities law known as MiFID.

The guidelines become effective in the second quarter of 2013 when there will be a general obligation on investment firms, banks and other sellers of financial products to deal with conflicts of interest and have adequate controls in place.

Britain has just launched its own consultation on curbing pay incentives that encourage high-pressure selling tactics to win bigger bonuses.

The ESMA guidelines cover all types of remuneration for sales staff, such as basic pay and bonuses.

Firms should not set strategic goals that focus solely on financial or commercial aspects without taking into account the potential harm to customers.

Pay policy must not favour one type of higher earning product over another, or cut someone’s basic salary substantially if specific sales targets are not met, ESMA said.

Paris-based ESMA said good practice would include follow-up interviews with a sample of customers after a sale to test if the sales person had acted honestly, fairly and professionally.

Regulators are trying to restore investor confidence in the tarnished financial sector in a bid to encourage people to save more for their old age.

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