As a result of a survey on the internal control procedures on the distribution network of financial intermediaries, on 15 February 2016 Consob published Communication n.0012130 dated 11 February 2016, which sets out certain best practices that financial intermediaries should take into account in connection with their internal control procedures on door-to-door offering for a more efficient compliance with the applicable regulation. 1. REGULATORY SCENARIO The Communication is essentially based on the provisions prescribed by MiFID (Directive 2004/39/EC). According to such regulation, financial intermediaries shall set up appropriate compliance procedures covering the activities of their tied agents, in order to ensure that such agents comply with the MiFID obligations of fairness and transparency when providing investment services outside their offices. At national level, the Communication takes into account the Joint Regulation Consob-Bank of Italy dated 29 October 2007 (on the organization and internal procedures of investment firms and asset management companies), which provides that the rules governing the compliance and control functions apply also to controls over off-site services and activities. In such regulatory framework and in light of the increased focus and enhanced articulation of the rules of conduct as well as disclosure requirements introduced by MiFID II (Directive 2014/65/EU), Consob intends to contribute to the correct application of the rules by focusing on the internal controls on financial intermediaries also in case of door-to-door selling. 2. BEST PRACTICES The Communication sets out certain guidelines that the financial intermediaries are recommended to implement in connection with their compliance and control functions with a view to improving the observance of the transparency and correctness obligation of their sales agents. In particular: 2.1 Persons in charge of controls 2.2 Remote controls: anomaly indicators CONSOB survey has showed that financial intermediaries make extensive use of anomaly indicators in remote controls in order to prevent possible irregular conducts. To improve the effectiveness of such instruments, Consob recommends: a the adoption of a number of indicators that covers at least all the 37 areas of interest set out by the “Code of Surveillance on tied agents’ conduct“, approved by Assoreti on 13 March 1998, which distinguishes 2 broad risk categories: a) risk of failure to comply with the rules of conduct, and b) risk of concealing losses from the client or steal the latter’s assets; b the use of indicators with the appropriate frequency, at least once a week, for increased effectiveness in terms of promptness of potential interventions; c the adoption of a suitable level of automation in the functioning of indicators, in order to reduce as much as possible the operational risks, with particular reference to large sales networks. 2.3 Interaction with the client Forms of interaction between the officer in charge of control functions directly with the client appears to play an effective supportive role in the overall control activity on distribution networks. In this respect, Consob recommends that, where the client is asked to give feedback on the service received or transactions executed through the tied agent, some measures ensuring the authenticity of the feedback provided by the client should be in place (for example, the investor should not be allowed to elect domicile with the financial intermediary). The contact channels should work in a way that requires the direct interaction with the client (thus not only in writing): for example, through visits on a sample of clients, phone calls and forms of automatic communication through software applications (such as acknowledgment SMS sent for each investment or disinvestment transaction). 2.4 Inspections Provided that each financial intermediary remains responsible for the set up of adequate inspection system, the Communication sets out some broad criteria: In other words, the use of inspections may be less intense if effective forms of interaction take place with the clients and numerous and frequent indicators of anomalies are deployed. Differently, in the absence of satisfactory alternative control tools, a higher number of on-site inspections should be necessary. Based on the findings of the survey, Consob singles out the crucial role of on-site inspections. It is therefore key that financial intermediaries correctly fine-tune the number and type of inspections, according to the overall set-up of the existing internal control systems over the sales agent. *** Door-to-door selling has always given rise to concerns about a potential risk of failure by the tied agents to comply with their obligations of fair and transparent business conduct, from one side, and a significant vulnerability of investors, from the other side. Such a concern is due to the circumstance that the services are actually carried out outside of the intermediary’s office and, therefore, the sales agent has indeed more leeway in dealing with the client and, at the same time, the client’s approach to judiciously evaluate the risks and his actual perception of the advice may be less attentive and analytical. With the above in mind, and in light of an ever-more articulated regulatory framework the Communication pursues the appreciable goal to suggest organizational solutions that can, to the extent possible, help financial intermediaries to develop suitable internal control systems in order to comply with the applicable regulation, with specific regard to a critical form of financial service. In addition, from a general point of view, it is undeniable that, as a consequence of the financial crisis, the attention on the compliance function has notably increased at the same pace as the growth of regulation in the financial sector. The publication of these best practices by Consob is the confirmation of such phenomenon, and it cannot be excluded that it is going to be one of further steps in this field, with the twofold objective (i) to provide clarity about the regulator’s position in respect of the solutions adopted so far, and (ii) to shorten the distance between the regulatory infrastructure and the volatile activity of tied agents. Contacts: Vito Vittore Elena Pagnoni Greta Caterina Carriero
Senior Partner
Of counsel
Associate
CONSOB publishes best practices for control of tied agents
[Newsletter n. 4]
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