Firstly, the legislature has legally defined the term “Vertriebsvorgaben” (sales policies and objectives) or the first time. In accordance with section 33 (1) sentence 2 no. 3a of the WpHG, sales policies and objectives directly or indirectly concern the turnover or volume of or the profit from the transactions recommended as part of the investment services enterprises’ investment advice”. Secondly, investment services enterprises are subject to an additional organisational requirement under the same rule. They must also design, implement and monitor such policies and objectives in such a way as to not adversely affect the interests of their clients.

This moves control measures for the sale of financial instruments more clearly into the focus of supervision. Despite the rule having already been in effect for some time, applying it in practice still results in some difficulties. The objective of this article is to make the matter clearer.

Potential conflict of interest

The background to implementation of the statutory rule was that investment services enterprises find themselves increasingly faced with the dilemma of acting in the interests of clients as well as in the interests of the enterprise to achieve and maximise profits. If an enterprise does not focus on the interests of its clients, it risks losing clients and facing supervisory consequences. On the other hand, enterprises must be as profitable as possible to survive on the market.

To increase profitability and control business performance, companies create systems, for example, that offer employees incentives for meeting their performance objectives, such as in the form of bonuses. Companies also attempt to control sales by setting objectives for individual employees or branches in order to achieve the financial targets set by company management. However, such objectives and measures run the risk of moving attention away from client interests in order to achieve company goals.

Section 31 (1) no. 1 of the WpHG had already stipulated prior to implementation of the Investor Protection and Capital Markets Improvement Act that enterprises provide investment services and ancillary services with the requisite degree of expertise, care and diligence in the interests of their clients. The legislature, however, considered it necessary to make this investment advice obligation more specific in order to strengthen the focus on client interests in addition to the necessary sales policies and objectives, thereby creating a balance between the two positions.

Scope

The new section 33 (1) sentence 2 no. 3a of the WpHG gave a name to sales control measures for the first time: “Vertriebsvorgaben” (sales policies and objectives). However, it became clear that many companies are unsure which internal objectives are actually covered by this term. Does the term only apply to internal policies that define a target for the sale of financial instruments expressed as a specific set of figures? Or does it suffice if only selected products are made available to an institution's investment advisor, for example in the form of a “recommendation list” or “in-house opinion”? Such product restrictions could also be based on objectives that have an impact on the turnover of, profit from or volume of transactions recommended by the investment advisor.

In accordance with section 33 (1) sentence 2 no. 3a of the WpHG, the term “Vertriebsvorgaben” covers all policies or objectives that directly or indirectly concern the turnover or volume of, or the profit from, the transactions recommended by the investment advisor. Thus financial objectives in this segment, in particular in the form of figures, do indeed by the wording of the provision fall under its scope of application. It is evident in the grounds for the law that the legislature consciously formulated the scope of application very broadly with the intention of comprehensive interpretation: As many sales models as possible that are on the market and that could impact client interests are considered to be sales policies and objectives.

As such, BaFin considers those measures that bear only an indirect relationship to the transactions that investment advisors recommend, to be sales policies and objectives as well. Consequently it makes no difference to BaFin whether the objectives of the investment services enterprises may impact the specific transactions that an investment advisor recommends.

In-house opinion

Many enterprises only grant their employees permission to provide investment recommendations for selected financial instruments. In this way they create a “product universe” or “in-house opinion”. BaFin does not consider measures of product restriction that only serve to ensure investment advice quality by providing, for instance, targeted training to employees on the selected products only, or only conducting research for the products in question, to be sales policies and objectives. In this case, legislation objectives are satisfied as client interests are not affected by profit maximisation measures in such cases.

If, on the other hand, the selection of products is not solely for the purpose of improving the quality of investment advice, but also for increasing financial revenue, then it forms part of the sales policies and objectives. In such a case, considerations such as turnover and volume of, or profit from transactions that are recommended by investment advisors play a role. Internal instructions may then, for example, not only serve for quality assurance of investment advice, if the potential sales volume is also included as a parameter in the product selection for the “product universe” or “in-house opinion”. In this case, profit aspects play a role. The same is true if especially products with higher margins are selected.

Remuneration model

The remuneration model of an investment services enterprise may be affected by turnover, profit or volume of the transactions which are recommended by investment advisors. If, for example, the remuneration model provides for noticeably reducing an investment advisor's base salary when the advisor does not meet the set sales targets – a purely quantitative criterion – there is a risk that the advisor will also recommend unsuitable financial instruments in order to increase remuneration.

Since the remuneration model has at least indirect influence on the specified parameters, such a remuneration model forms part of the sales policies and objectives. Moreover, it does not meet the Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency pursuant to Sections 31 et seq. of the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) for Investment Services Enterprises (MaComp) for remuneration systems in relation to provision of investment services and ancillary services (MaComp BT 8.3.3).

Negative connotations?

What are the consequences of an enterprise's internal measures qualifying as sales policies and objectives? Some institutions have expressed their concern to BaFin that the term “Vertriebsvorgabe” could have negative connotations – for example, that an enterprise that uses sales policies and objectives puts pressure on its employees.

However, this concern is unfounded. As the term is very broadly defined, almost all investment services enterprises work with sales policies and objectives, as legally defined, in their provision of investment advice. There is thus no risk of an individual enterprise being seen as possessing a unique negative feature or being stigmatised.

Moreover, the legislature has explicitly not made classification as sales policies and objectives dependent on whether sales pressure can arise in an enterprise as a result of the rule. This clearly demonstrates that sales policies and objectives are neither objectionable nor should they be prevented. Furthermore, the term “Vertriebsvorgaben” itself is a neutral legal term.

Organisational and documentation requirement

Not least the fact that classifying measures as sales policies and objectives results in “only” an organisational requirement proves that the concern regarding negative connotation is unfounded; the measure is to be designed, implemented and monitored in such a way as to not affect any client interests.

Moreover, section 14 (3a) of the German Investment Services Conduct of Business and Organisation Regulation (Wertpapierdienstleistungs-Verhaltens- und Organisationsverordnung – WpDVerOV, only available in German) requires enterprises to keep records of both sales policies and objectives and the measures involved in their implementation and monitoring, the fulfilment of the sales policies and objectives, the criteria for checking alignment of sales policies and objectives with client interests as well as the results of such check. This documentation requirement did not exist prior to the entry into force of the Investor Protection and Capital Markets Improvement Act.

New European requirements

The new European Markets in Financial Instruments Directive, MiFID II, includes no direct requirements regarding sales. Nevertheless, some of the rules may affect sales, at least indirectly.

In accordance with Article 24(7b) of MiFID II, investment services enterprises will not be allowed to accept any monetary or larger non-monetary benefits from any third party in relation to the provision of independent investment advice. Minor non-monetary benefits that are capable of enhancing the quality of service must be clearly disclosed to the client. The same applies to portfolio management services (Article 24(8)). Investment services enterprises in Germany are already subject to a similar rule under section 31d of the WpHG. The new provision limits the size of inducements in such cases in future.

However, it may be of more significance to enterprises that, in accordance with Article 24(2), they will be required to identify a target market for the sale of financial instruments to end clients. Moreover they will have to ensure that the strategy for distribution of the financial instruments is compatible with the identified target market and that the product is sold accordingly. Investment services enterprises will also be required to regularly review and assess the instruments that they offer or market in terms of whether the sales strategy remains appropriate (Article 16(3)).

The European Securities and Markets Authority (ESMA) will provide details on MiFID II requirements via its regulatory technical standards (RTS) and implementing technical standards (ITS).