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The impact of MiFID II on corporate governance

The impact of MiFID II on corporate governance
Written by
Stephanie ter Brake

There seems to be consensus among regulatory bodies at international level that weaknesses in corporate governance in a number of financial institutions, including the absence of effective checks and balances, have been a contributory factor to the financial crisis. The Markets in Financial Instruments Directive II (“MiFID II”) therefore aims, among other things, to strengthen the role of management bodies of investment firms, regulated markets and data reporting services providers (henceforth: “financial firms”) in ensuring sound and prudent management of the firms, the promotion of market integrity and the interest of investors. Most of the MiFID II provisions will become effective in January 2017, so it is important for firms to implement any necessary changes to their internal policies before that date. Below we will describe the most important corporate governance requirements under MiFID II.

Role and responsibility of the management body

Whereas MiFID I sought to ensure that financial firms were managed in a sound and prudent manner by specifying certain attributes which must be held by those who direct the affairs of the firm, MiFID II goes further and sets out the role and responsibility of the management body itself. According to MiFID II, the management body:

“defines, oversees and is accountable for the implementation of governance arrangements that ensure effective and prudent management of the investment firm including the segregation of duties in the investment firm and the prevention of conflicts of interest.”

Cross-over with CRD IV

MiFID II requires management bodies of financial firms to comply with the governance arrangements and requirements as set out in the Capital Requirements Directive (“CRD IV”). Pursuant to Articles 88 and 91 of CRD IV, the management body must:

  • have overall responsibility for the firm and approve and oversee the implementation of its strategic objectives, risk strategy and internal governance;
  • ensure the integrity of the accounting and financial reporting systems;
  • oversee the process of disclosure and communications; and
  • oversee senior management.

The management body is also required to monitor and periodically assess the effectiveness of the governance arrangements and take appropriate steps to address any deficiencies.

In addition, members of the management body need to:

  • commit sufficient time to perform their functions;
  • comply with numerical limits on the number of executive and non-executive directorships they can hold;
  • have adequate collective knowledge, skills and experience to be able to understand the firm’s activities and main risks; and
  • act with honesty, integrity and independence of mind to effectively assess and challenge the decisions of senior management where necessary and oversee and monitor management decision-making.

Number of directorship

Members of the management body of financial firms need to commit sufficient time in order to perform an oversight role. For this reason, members of the management body of significant investment firms must hold no more than:

  1. one executive directorship with two non-executive directorships; or
  2. four non-executive directorships,

at the same time in different entities. Directorships in non-profit organizations do not have to be taken into account. Competent authorities, such as the Dutch Financial Market Authority (Autoriteit Financiële Markten), may authorize executive directors to hold one additional non-executive directorship.

Composition of the management body

In general, members of the management body of financial firms need to possess a good repute and adequate collective knowledge, skills and experience to be able to understand the firm’s activities including the main risks. Financial firms on the other hand must devote adequate resources for the induction and training of members of the management body.

To avoid group thinking and facilitate independent opinions and critical challenge, management bodies need to be sufficiently diverse as regards age, gender, geographic provenance and educational and professional background to present a variety of views and experiences. Therefore, diversity needs to be one of the criteria for the composition of management bodies.

Financial firms need to address diversity in their recruitment policy, for instance by selecting candidates from shortlists which include both genders. Besides, employee representation in management bodies could be seen as a positive way of enhancing diversity. Finally, the chairman of a financial firm may not simultaneously act as the chief executive officer of the same firm, unless justified by the firm and authorized by competent authorities.

Remuneration

MiFID II introduces the new requirement that management bodies should define, approve and oversee the remuneration policy of employees involved with clients, which must have the following fundamental objectives:

  1. encouraging responsible business conduct by the firm;
  2. ensuring the fair treatment of clients; and
  3. avoiding conflicts of interest in the relationship with clients.

MiFID II explicitly makes the link between remuneration and conflicts of interest. Whilst firms had a duty to organize themselves so as to effectively manage conflicts under MiFID I, pursuant to MiFID II firms must take all appropriate steps to identify, prevent or manage conflicts of interest, including those caused by the firm’s own remuneration and other incentive schemes.

Please don’t hesitate to contact us if you have any queries, or if you need any help with the implementation of the corporate governance requirements pursuant to regulatory requirements or otherwise.

E-mail: info@tripletbusinesslawyers.com

Phone: +3120-333 02 40

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