On 13 October 2023, the CSSF released a circular on remuneration requirements under Directive 2014/65 on markets in financial instruments (“MiFID II”) to integrate into the CSSF’s administrative practice and regulatory approach the Guidelines of ESMA on certain aspects of the MiFID II remuneration requirements published in April 2023.
On 13 October 2023, the Commission de Surveillance du Secteur Financier (the “CSSF”) released a circular on remuneration requirements under Directive 2014/65 on markets in financial instruments (“MiFID II”).
Circular CSSF 23/841 aims at (i) integrating into the CSSF’s administrative practice and regulatory approach the Guidelines of the European Securities and Markets Authority (“ESMA”) on certain aspects of the MiFID II remuneration requirements published in April 2023, (ii) repealing Circular CSSF 14/585 which had added an Annex V to Circular CSSF 07/37 on conduct of business rules in the financial sector and consequently (iii) amending Circular CSSF 07/307.
The Circular applies to i.a. credit institutions and investment firms as defined under the amended law of 5 April 1993 on the financial sector, as from its publication.
On 31 March 2022, ESMA released the final report on guidelines on certain aspects of the MiFID II remuneration requirements (the “Guidelines”) and on 3 April 2023, ESMA released translated versions of such final report, which applies as from 4 October 2023.
The Guidelines update the previous guidelines on remuneration policies and practices, based on MiFID I and issued in 2013 (the “2013 GL”).
More precisely the Guidelines (i) delete some parts of the 2013 GL to the extent that these parts have been integrated into the MiFID II framework and (ii) lightly reorganise its content. But most of the recommendations provided for in the 2013 GL remain unchanged in the Guidelines and are still intended to protect clients’ interests.
The Guidelines describe (i) the design of remuneration policies and practices, (ii) the governance, and (iii) the controlling risks related to remuneration policies and practices. The Guidelines are supplemented with examples of good and poor practice and illustrative examples.
In relation to the design of remuneration policies and practices, the Guidelines indicate that firms shall consider qualitative and quantitative criteria. These criteria should be sufficiently and clearly defined and documented. Quantitative criteria should not create conflicts of interests or incentives that may lead the relevant persons to favourise their own interests or their firm’s interests to the potential detriment of any client. Regarding variable remuneration, firms should avoid setting performance targets that may incentivize the relevant persons to adopt behaviours focused on short-term gains. Firms should also consider including ex-post adjustment criteria of their variable remuneration if feasible.
In order to avoid conflicts of interests, the design of the remuneration policies and practices applicable to control functions, management body and senior management of the firm should not compromise their objectivity and independence. As such, the remuneration of control functions’ staff should be based on function-specific objectives.
From a governance perspective, in addition to the periodic review of the written remuneration policy, firms should also review it upon relevant and significant amendment to their business activities or structure.
Regarding controls to assess compliance with their remuneration policies and practices, firms should use a wide range of information on business quality monitoring and sales patterns, including trend and root-analysis to identify areas of increased risk and to support a risk-based approach to sales monitoring. Firms should ensure that the results of such analyses and controls are clearly documented and reported to senior management together with proposals for corrective action, if necessary.