UniCredit reply to the ESMA consultation on: Guidelines on remuneration policies and practices (MIFID)

Transcription

1 29 November 2012 FOR PUBLICATION UniCredit reply to the ESMA consultation on: Guidelines on remuneration policies and practices (MIFID) i) UniCredit is a major international financial institution with strong roots in 22 European countries, active in approximately 50 markets, with about branches and more than employees. UniCredit is among the top market players in Italy, Austria, Poland and Germany. In the CEE region, UniCredit operates the largest international banking network with around branches and outlets. UniCredit Group is a market leader in the CEE region. ii) UniCredit aims to properly serve individual markets with a local approach while leveraging the synergies and economies of scale of a large cross-country Group. a. The centrality of customer: UniCredit operating model was developed with the intention of keeping it close to its customers, understanding their needs and building fair, transparent and long-term relationships with them. Offering concrete solutions to the challenges and opportunities encountered by our customers is at the center of UniCredit people s daily work. b. The multi-center approach: UniCredit multi-center approach allows UniCredit local banks to manage the distribution network directly, while maintaining the advantages of having access to the expertise of its global product and service lines. c. Global product and service lines: UniCredit global product lines are responsible for the centralized development of products and services, such as in the fields of leasing and electronic payment systems. That permits UniCredit to develop a broader and more competitive range of offerings in all the countries in which it operates. iii) The reply given throughout the current document contains the rationale underpinning UniCredit position with regards to the following questions. When any significant proposal/alternative by UniCredit that ESMA may consider is set out, it has been purposely underlined. 1

2 Executive Summary UniCredit Group welcomes the ESMA project to build up a consistent framework on remuneration policies and practices under MiFID. UniCredit expresses its general agreement with the draft guidelines. With regard to the topics under consultation, UniCredit is strongly committed to generating sustainable value for our customers. ESMA believes that there is divergence in the ways firms determine how to address conflicts of interest and conduct of business risks arising from their remuneration policies and practices. In a forward-looking perspective, UniCredit suggests ESMA to consider to frame and set up a EU-wide comparative analysis on remuneration policies and practices being implemented by firms, whose findings then should be made public and open to public debate for policy implications. As for interlink between remuneration policies and practices and the conduct of business risk management obligations, UniCredit suggests that the guidelines ought to further expand into implementation details and criteria to be used within the concept alignment. ESMA may consider providing further details and clarifications regarding the meaning both of management information (ref. question 10) and also quality of the service provided to the client (ref. question 11). 2

3 Specific answers for the Consultation Premise and general assessment i) Being primarily committed to generating sustainable value for his own customers UniCredit Group welcomes the ESMA project to build up a consistent framework on remuneration policies and practices under MiFID. As a general premise, UniCredit would like to express its own general agreement with the draft guidelines set out in the consultation paper as they are deemed to foster a consistent application of the existing rules across Member States. ii) ESMA gathered evidence from July 2011 remuneration questionnaires to supervisors. Findings indicated that there is divergence in the ways firms determine how to address conflicts of interest and conduct of business risks arising from their remuneration policies and practices. ESMA believes that «this divergence in approaches to the setting of remuneration for relevant persons could be addressed, in part, by appropriate guidelines based on MiFID requirements». In a forwardlooking perspective, should ESMA decide to address the remaining divergences (i.e. the ones that remain once the MiFID guidelines are in force) of the approaches towards remuneration, we would like to stress the need of a comparative analysis intended to figure out which are the underpinning factors and the reasons behind the remaining divergences. UniCredit suggests ESMA to consider to frame and set up a EU-wide comparative analysis whose findings then should be made public and open to public debate for policy implications. 3

4 I. Governance and design of remuneration policies and practices in the context of the MiFID conduct of business and conflicts of interest requirements Question 1: Do you agree that firm s remuneration policies and practices should be aligned with effective conflicts of interest management duties and conduct of business risk management obligations so as not to create incentives that may lead relevant persons to favour their own interest, or the firm s interests, to the potential detriment of clients? Please also state the reasons for your answer. ii) UniCredit is first and foremost committed to generating sustainable value for customers, which is reflected, among others standards, in the principles of UniCredit Group Compensation Policy. Within this framework, guidelines are defined to implement compensation programs and plans that reinforce sound risk management policies and our long-term strategy. In doing so, UniCredit most effectively meets the specific and evolving needs of our different businesses, market contexts and employee staff and ensures that business and people strategies are always appropriately aligned with our remuneration approach. iii) The supervisors of the Group holding - Bank of Italy and Consob (the Italian Companies and Stock Exchange Commission) - focus on the principle that remuneration policies and practices should be aligned with both the duties of effective conflicts of interest management and obligations of conduct of business risk management in order to ensure that clients interest is not impaired by the remunerations policies and practices. iv) With particular reference to the connection between remuneration policies and practices and the conduct of business risk management obligations, UniCredit suggests that guidelines ought to further expand the meaning of alignment within the context set out by the question above. More precisely, also making reference to the above mentioned Italian supervisory practices, UniCredit believes that such an alignment has to be intended as a specific connection between the criteria for remunerating the staff - especially staff facing clients - and the compliance with internal rules and procedures concerning the business management. v) Based on UniCredit experience, ESMA may consider including in this Guidelines a proper reference to the governance and an appropriate disclosure of incentive system s features into the remuneration policy. By doing this, distorted incentives which might lead to excessive risk-taking behaviors would be avoided (for instance 4

5 short term incentives for the management, or provisions of benefits different from remuneration to managers, in case of transactions with related parties with potential conflict of interest). vi) UniCredit Italy launched in April 2012 an advice service to retail customers. In coherence with the principles set out in the consultation document, the remuneration policy for branch operators is flat with regard to the investment products included in the main catalogue. Question 2: Do you agree that, when designing remuneration policies and practices, firms should take into account factors such as the role performed by relevant persons, the type of products offered, and the methods of distribution? Please also state the reasons for your answer. ii) In the design of the remuneration policies and practices the role performed by relevant persons, the type of products offered and the methods of distribution should be considered in order to prevent potential conduct of business and risks of conflict of interest from adversely affecting the interest of clients. iii) UniCredit incentive systems align individual goals and behaviors to long term mission and avoid an excessive short-term focus by reflecting the principles of Group Compensation Policy, focusing on parameters linked to profitability and sound risk management, in order to guarantee sustainable performance in the medium and long term. iv) In UniCredit, an appropriately balanced performance-based compensation element is encouraged for all categories of employees as a key driver of motivation and alignment with organizational goals and is set as a policy requirement for all business roles. v) As far as the role of relevant persons is concerned, a remuneration policy should, for example, take into account whether the staff is involved in relationships with clients or whether the function has to be independent of business functions. vi) Still with regard to the point posed by the question, UniCredit suggests to supplement the proposed criteria by adding a specific reference to services provided (besides the reference to products offered ). 5

6 Question 3: Do you agree that when designing remuneration policies and practices firms should ensure that the fixed and variable components of the total remuneration are appropriately balanced? Base salaries should be appropriate in the specific market for the business in which an individual works and for the talents, skills and knowledge that the individual brings to the company. The level of fixed pay should be sufficient to allow the variable part to be proportionally decreased, so that appropriate risk-taking behavior is encouraged. ii) Within its sustainable pay approach UniCredit sets up a balanced total compensation structure through the mechanism of setting an appropriate ratio between fixed and variable compensation elements, avoiding a misbalance in favor of the variable components which might induce behaviors not aligned with the company s sustainable business results and risk appetite. Question 4: Do you agree that the ratio between the fixed and variable components of remuneration should therefore be appropriate in order to take into account the interests of the clients of the firm? Please also state the reasons for your answer. ii) The remuneration design features, including performance measures and pay mechanisms, must avoid an excessive short-term focus by reflecting the principles of remuneration policies, focusing on parameters linked to profitability, sound risk management and taking into proper account the interest of clients, in order to guarantee sustainable performance in the medium and long term. iii) Within UniCredit s sustainable pay approach, pay is directly linked to performance and the rewards are consistent with long-term stakeholder value creation, avoiding the disequilibrium towards variable compensation which may induce behaviors not aligned with the company s sustainable business results and risk appetite. iv) ESMA could consider to provide further guidance on how the appropriateness 6

7 requirement ought to be best interpreted and implemented in order to take account of the interests of all stakeholders (including firms clients). Question 5: Do you agree that the performance of relevant persons should take account of non-financial (such as compliance with regulation and internal rules, market conduct standards, fair treatment of clients etc.), as well as financial, criteria? Please also state the reasons for your answer. ii) The assessment of relevant persons should be based on both financial and nonfinancial criteria aiming at encouraging them to act in the best interests of the client, including a compliance assessment with regulatory requirements and internal procedures, market conduct standard, fair treatment of clients and business retention. iii) This key principle - already set forth in the UniCredit Group Compensation Policy becomes crucial for customer-facing roles whose evaluation must be based (further to financial and performance-related goals) also on behavioural features throughout the relationship with the customer, such as customer care or compliance indicators. iv) With regard to the performance of relevant persons, for the individual performance overall appraisal, it should be considered, for instance, the employee s compliance with internal/external rules, his/her possible misconducts if any, disciplinary actions by the Company, etc. This makes the overall incentives better aligned so as to properly deliver services for customers. 7

8 Question 6: Do you agree that the design of remuneration policies and practices should be approved by senior management or, where appropriate, the supervisory function after taking advice from the compliance function? Please also state the reasons for your answer. ii) UniCredit s corporate governance framework, under which UniCredit Group Compensation Policy is annually approved, ensures clarity and clear accountability in decision-making timely managed at appropriate levels, while avoiding conflicts of interest. iii) The Remuneration Committee is also given the role of advising the Board of Directors on Group remuneration strategy by analyzing and monitoring international market compensation trends, practices and pay levels. On an annual basis, the Group Compensation Policy, as proposed by the Remuneration Committee, is submitted to the Board of Directors for approval. The policy is subsequently presented to the shareholders Annual General Meeting for approval. iv) Furthermore, it must be stressed that Compliance function advice should essentially cover a regulatory alignment between the remuneration policies and practices (i.e. systems) with the main business conduct rules (including conflicts of interest) set forth by relevant provisions (both at national and international level) and internal regulations as well. Question 7: Do you agree that senior management should be responsible for the implementation of remuneration policies and practices, and for preventing and dealing with any the risks that remuneration policies and practices can create? Please also state the reasons for your answer. UniCredit agrees with the proposed approach, taking into account the relevant MiFID provisions which require senior management or, where appropriate, the supervisory function to hold responsibility for ensuring that the ultimate goal of having appropriate remuneration policies and practices is not circumvented both at individual or Groupwide level. 8

9 Question 8: Do you agree that the organizational measures adopted for the launch of new products or services should take into account the remuneration policies and practices and the risks that the new products or services may pose? Please also state the reasons for your answer. ii) This approach is also in line with some recent Italian supervisory practices already applicable to the Group holding. More in particular, with regard to the process for setting up new products and services, those supervisory practices envisage the involvement of several functions - including the internal control functions - precisely for the purpose of dealing with the different classes of risk underlined by new products and services. Question 9: Do you agree that the process for assessing whether the remuneration features related to the distribution of new products or services comply with the firm s remuneration policies and practices should be appropriately documented by firms? Please also state the reasons for your answer. ii) An appropriate documentation and formalization of the process for remuneration policy approval aims to ensure (through the ex-ante involvement of all the relevant functions) the consistency of the aspects related to the distribution of new products or services with the relevant rules (including those directly connected with MiFID requirements). In addition to this, ex-post controls performed by relevant functions at different levels should be put in place to verify the correct practical implementation of the policy. 9

10 II. Controlling risks that remuneration policies and practices create Question 10: Do you agree that firms should make use of management information to identify where potential conduct of business and conflict of interest risks might be occurring as a result of specific features in the remuneration policies and practices, and take corrective action as appropriate? Please also state the reasons for your answer. ii) Based on past experience, a proper monitoring of conduct of business may suggest further improvements to fine tune the incentive systems. iii) With particular reference to the corrective actions to be taken in order to avoid conflict of interest risk, ESMA may consider to further clarify the meaning of management information referred to in this question. iv) More specifically, it would be extremely helpful the use of a specific list of management information clearly defined, because of a clear cut framework for the Compliance function to take an appropriate action plan. Question 11: Do you agree that firms should set up controls on the implementation of their remuneration policies and practices to ensure compliance with the MiFID conflicts of interest and conduct of business requirements, and that these controls should include assessing the quality of the service provided to the client? Please also state the reasons for your answer. ii) In this respect, controls on remuneration policies and their implementation could be broken down as follows: a) those pertaining more to the incentive system set-up and validation. They consist in the Policy evaluation and in the subsequent verification of the proper application of the principles (for instance, presence of qualitative 10

11 performance measures, customer interest set as a driver, etc.) set forth in the Policy at a lower organizational level (e.g. sales staff incentive systems); b) those relating to MiFID requirements (e.g. suitability and appropriateness) that are currently in place. iii) As a result of the above breakdown, UniCredit would not see any role for the Compliance function regarding the verification of incentive systems implementation at an individual scorecard level. The reason is that the control on the proper application of the principles in such a case should be up to the 1 st and 2 nd level controls, which are with Human Resources function (at different levels). On the other hand, the controls on the actual implementation of incentive systems (i.e. appraisal, consistency of payouts) are up to the 3 rd level controls. iv) With regard to the inclusion of monitoring of calls for telephone sales 1 among the controls on the quality of the service provided to the client, it has to be stressed that, because of the national options embedded in the MiFID in force, telephone orders recording is not mandatory on a full EU-wide basis. As a matter of fact such an obligation is currently in force in those EU Member States that have exercised the national option provided by MiFID on this topic (for instance, the duty applies in Italy but not in Germany and Austria). v) It should be better specified what quality of the service provided to the client 2 means (i.e. as the above mentioned suitability and appropriateness or as a more general value proposition to clients). In case the quality has to be intended as value proposition to clients UniCredit would deem difficult to recognize such an element by a regulatory perspective in order to evaluate its impact on the remuneration policies/practices. vi) With regard to UniCredit Italy, in addition to the provision of a better service quality, it is worth highlighting that the provision of advice to the customer also includes a check of the actual portfolio versus the customer ideal one (in terms of Model portfolio ) taking into account the Group investment Committee view. Such a check is run by means of two main indicators:1) adherence in asset class; 2) coherence with investment needs. vii) According to UniCredit Italy the planned remote advice process, not yet delivered but reported in the advice contract, will have record keeping of each step. After the confirmation of the received personalized recommendation, customers will be able to execute the related order either by internet banking or by branch operator. 1 ESMA, Guidelines on remuneration policies and practices (MiFID), Consultation Paper, 17 September 2012, 67, p ESMA, Guidelines on remuneration policies and practices (MiFID), Consultation Paper, 17 September 2012, p

12 Question 12: Do you agree that the compliance function should be involved in the design process of remuneration policies and practices before they are applied to relevant staff? Please also state the reasons for your answer. Unicredit Feedback ii) In UniCredit this principle, is already applied both at holding company and at a Group level. Since the very beginning of the annual process of reviewing the Group Compensation Policy, Group Compliance and Group HR functions promote and foster a strong cooperation among themselves (i.e. HR and Compliance) all over the Group. The strong cooperation between Compliance and HR aims at obtaining remuneration/incentive frameworks whose features are fully agreed and checked before their implementation, allows optimizing the compliance evaluation process as well. iii) Over the past five years (since MiFID s entry into force), Italian regulators have focused their attention mainly on identified staff as per the EBA definition. Therefore it should be taken into account that Compliance ex-ante involvement in the definition of the remuneration policies and practices for customer-facing roles all over the Group already took place and it is still ongoing. Further improvements will be reached through a progressive rollout, reckoning also with the differing degree of regulatory attention on the topic across jurisdictions, as well as on the variety of involved processes. iv)in this respect, please also refer to the feedback to the question 6 above. 12

13 III. Annex Illustrative examples of remuneration policies and practices that create conflicts that may be difficult to manage Question 13: Do you agree that it is difficult for a firm, in the situations illustrated above in Annex I, to demonstrate compliance with the relevant MiFID rules? Unicredit Feedback The provided examples underline possible features of conflicts of interest, with a related potential negative impact in terms of clients best interest care. Question 14: If you think some of these features may be compatible with MiFID rules, please describe for each of (a), (b), (c) and (d) in Annex 1 above which specific requirements (i.e. stronger controls, etc) they should be subject to. Unicredit Feedback The features referred to in the examples might entail potential not compliant behaviors (with respect to the MiFID requirements). In any case, UniCredit believes that such features must be analyzed on a case-by-case basis and whenever a compliance risk is detected, then it should be properly tackled with an appropriate and balanced mix of ex ante controls (e.g. compliance preliminary evaluation) and ex post controls (e.g., dedicated controls on the selling practices with the purpose to identify possible sales not in line with the clients best interest). 13

14 Contact people Please find below the list of the key people involved in this work, whose contribution made possible to coordinate and provide UniCredit answers to this Consultation. Some other experts have been involved alongside the UniCredit Group, but are not listed below. Coordination Team and Contributor European and Regulatory Affairs / Public Affairs Costanza Bufalini - Head of European & Regulatory Affairs Laura Esposito - European & Regulatory Affairs Micol Levi - Head of Regulatory Affairs Riccardo Brogi - Regulatory Affairs Andrea Mantovani - Regulatory Affairs Other Contributors HR Compensation (Key Contributor) Giovanni Lanati - Head of HR Compensation Roberta Sapia - HR Compensation Georgeta Stanica - HR Compensation Compliance (Key Contributor) Giuseppe Silvestro - Head of Global Compliance CAMP, Controls and Reporting Massimo Puricelli - Head of Global Compliance Organization & Reporting Federico Tomassini - Compliance Organization Enrico Bertulessi - Co-Head of Global Regulatory Counsel Antonio La Rocca - Co-Head of Global Regulatory Counsel Francesco Martiniello - Head of Global Financial Services Counsel Retail Anna Giordano - Head of Affluent Segment Management Giovanni Balzano - Head of Upper Affluent Enrico Luzi - Upper Affluent Organization Andrea Vintani - Head of Sizing and Benchmarking Ettore Veneziani - Head of Organization Development Corporate Law Ermanno Bonessi - Head of Corporate Law Advice Manlio Stefano Nuzzo - Corporate Law Advice 14