What do the ESMA and AFM reports say about the compliance function?

In June 2020, ESMA issued a report on the requirements of the compliance function. On December 14, 2020, the AFM published the report “Tools for improving the compliance function. What exactly does these reports say and what does it mean for your organization and/or yourself? Our chairman of the Compliance Professional Advisory Committee, Henri Ruijgrok, explains the reports.

European regulator ESMA report on the compliance function

In June 2020, European regulator ESMA released its new report on the compliance function,[1] which includes guidelines or guidance for investment firms and banks providing investment services. These institutions must “make every effort to comply with these guidelines”. The AFM applies these guidelines when monitoring compliance with Part 4 of the Financial Supervision Act (Conduct of Business Supervision).

While the goals and principles of the compliance function have remained unchanged from ESMA’s previous 2012 Report on the Compliance Function, a number of obligations have been described in more detail. In addition, Guideline 6 on the skills, knowledge, experience and authority of the compliance function is new. Below are some of the key changes in the guidelines for the compliance function and more specifically the guideline on knowledge and experience. The new guidelines are expected to go into effect in Q2 2021.

New compliance function implementation requirements

• The new ESMA report includes extensive requirements about the compliance function conducting a formal risk assessment to ensure that all compliance risks are monitored.
• In addition, requirements about information in written compliance reports to senior management have been tightened. For example, deviations by senior management from key compliance advice must be disclosed in the compliance reporting. Extensive reporting on product governance is also required.
• According to Guideline 6, compliance employees of a financial company must have the necessary skills, knowledge and experience. In addition, the compliance function must have the necessary authority. The latter means, among other things, that compliance employees must have adequate knowledge and experience and personal skills (including judgment). In terms of knowledge, the compliance function must at least have knowledge of MiFID II-related regulations and standards, guidelines from ESMA and regulators, insofar as relevant to the performance of the compliance work. Compliance staff must therefore be regularly trained to keep this knowledge up to date.
• The so-called “designated compliance officer” must have a higher level of knowledge and experience. The compliance officer must have sufficient knowledge and experience to take responsibility for the compliance function as a whole. Some European regulators conduct an assessment of the compliance officer to be appointed. The compliance officer must have demonstrably sufficient professional experience. In some jurisdictions, that work experience must be a minimum number of years and must not be outdated. According to ESMA guidelines, the compliance officer must also have specific knowledge of the various activities of the organization where he/she works. A compliance officer at an asset management company will therefore have to have knowledge of asset management, stock exchange trading, investing, etc., in addition to the applicable MiFID II regulations. This has consequences for the knowledge, experience and/or training courses followed by the compliance officer.

Compliance functions at financial firms, which fall under the scope of MiFID II, will need to assess their compliance with the amended ESMA guidelines. This is especially true for the training standards for compliance professionals that are new in the ESMA guidelines. Compliance officers in organizations covered by the guidelines will need to have demonstrable knowledge of MiFID II regulations. In addition, the compliance officer will need to have knowledge of the organization’s business activities.

AFM report ‘Tools for improving the compliance function’

On December 14, 2020, the AFM published the report “Tools for Improving the Compliance Function. The report, based on a survey of investment firms, among others, shows how the organization can improve the maturity level of the compliance function. One of the topics the AFM reviewed in this study is having adequate people available. Compliance with ESMA Guideline 6 can contribute to this. In 2021, the AFM will examine the compliance function at banks.

DSI Register Compliance Professional

An important tool in demonstrating that compliance staff have knowledge and experience is a registration as a Compliance Professional with DSI. To qualify for registration, there are requirements for minimum work experience and education.

Henri Ruijgrok is Head of Compliance Global Markets at ABN AMRO Bank and chairs the DSI Compliance Professional Advisory Committee. This article was written in a personal capacity.

[1] Final report Guidelines on certain aspects of the MiFID II compliance function requirements, June 5, 2020.