by Domenico Iodice
The legislator of MiFID II and of the financial markets, but also of the regula-tions on non-financial reporting, social sustainability and the so-called ‘green transition’, has mainly had at heart the protection of users-consumers, who in the financial intermediaries sector take on the ‘facies’ of savers. The objective of the interventions that have been stratified over time, at the Community level, has been above all to ensure credibility and stability to the financial markets within the perimeter of the Union, through regulations for the protection of the con-sumer of financial advice.
Has this overall intervention been sufficient to restore confidence in the system as a whole? Unfortunately, it has been recorded that, even after MiFID II, appli-cation problems, distortions and misselling phenomena have always been rele-gated to individual operational anomalies, i.e. the responsibility of individual ad-visors, and never attributed to the organisational fault of financial intermediaries.
This data shows that the regulatory interventions carried out so far have operated on formal models of exemption from the legal liability of companies, without addressing a practical issue: how to ensure the factual independence of the advi-sor from constraints related to commercial budgets, the full exploitation of his professionalism in the interest of the client (indeed: according to MiFID II, to protect the best interests of the client).
This gap must be filled as a matter of urgency, in order to fully restore the trust and reputation of the financial system. It is necessary for the Community legis-lator, after consulting the European social partners, to ensure, by means of a legal safeguard (a sort of ‘employee-consultant statute’), the necessary independ-ence of workers from commercial solicitations for the sale of certain financial products. Below are some recommendations for regulatory action addressed to the European Commission.
1 – MiFID-compliant valuation and incentives
The employee who performs consulting services, in the application of MiFID regulations, must be evaluated exclusively on the basis of data endogenous to the service, in the application of regulatory criteria that explain the concept of com-mitment, dedication, professionalism, judgment and sense of responsibility and
not on the basis of data, entirely exogenous and imponderable ex ante, of the achievement of predetermined sales budgets. In concrete terms, it is therefore necessary to intervene both on the performance evaluation system, and on the definition of the nature of the economic incentive system, which today is de facto unrelated to remuneration ‘ratione temporis’ and built, in fact, largely on commer-cial results.
2 – European employee-consultant passport
Action should be taken on the certification of competences of employees provid-ing consultancy services. By analogy with the figure of the registered financial adviser, it should take the form of a sort of European passport, capable of en-couraging geographic and functional mobility.
3 – Statute of the consultancy in subordinate employment and compliance supervision It is necessary to intervene to safeguard the independence of employees from commercial pressures, both by introducing a ‘statute’ of rights and protections for consultants, and by implementing compliance functions, which must be ex-tended both to the active control of organisational and distribution practices of companies, and to support each worker or groups of workers who request assis-tance. It would also be important to ensure organic dialogue with workers’ rep-resentatives.
4 – Separation of the Single Officer for the Safeguarding of Client Assets
A specific person responsible for safeguarding client assets, distinctly designated by the bank or financial intermediary (in accordance with the ESMA Guidelines and national supervisory authorities) to safeguard financial instruments and liq-uid assets of clients, should be provided with separate and adequate resources, training, and, most importantly, broad freedom of action and maximum opera-tional effectiveness. In the first place, this function cannot be limited to oversee-ing the separation of assets between the clients’ assets and the intermediary’s assets, but must be able to guarantee the clients’ rights to the assets entrusted to the intermediary’s management. This role should not, therefore, be performed by those who already perform the function of compliance officer. On the con-trary, only the effective inter-location of the client protection function with the compliance function can help to counter the so-called commercial pressures and allow to adequately represent the point of view of clients and employees, which on the subject of responsible advice records a full convergence, if not coinci-dence of intentions. To this end, it would be important to be able to establish
even informal channels of connection and profitable dialogue between this figure and workers’ representatives.
5 – Digitisation and inclusive platforms for ‘aged’ consultants
Job insecurity is a consequence of digitalisation, which also affects financial ad-vice. It induces a transformation of the psychological contract between employer and employee: it would be intended to move from a ‘relational’ contract, based on mutual trust and loyalty for the duration of working life, to a ‘transactional’
contract, based on an exchange between services of monetary value (salary vs.
achievement of economic objectives) for a limited or defined period or object. The new digital platforms morphologically present themselves as a new employer. In other words, operationally, the worker ‘depends’ on the platform, rather than on a physical employer. The platform disintermediates not only the relationship be-tween worker and employer/entrepreneur, but also bebe-tween the latter and the final customer. The most evident effect of this new morphology of the working relationship is the practical redefinition of the content of the work performance, aimed at achieving the business objectives, ‘promised’ directly by the worker to the end client, also in the consultancy service. This connotation of the work of digital platforms would intend to transform the obligation of means into an ob-ligation of results and risks generating exclusion, i.e. early exodus, for older work-ers who are victims of the digital divide, as well as (for everyone) a sense of individual disorientation and alienation. These effects arise from the integrated action of timing of activities and an algorithmic measurement of the results of the activities, that risks betraying the deepest values of the MiFID: the achieve-ment of the best interests of the client. It is all about performance (and related performance anxiety): scoring and rating systems take into account the response time of the worker and other elements, not necessarily of a qualitative nature, in their assessment of excellence.
In fact, and in contrast to the previous empirical assumptions, the same digital platforms would be suitable to provide advisory support also to the so-called internal client, i.e. the worker called to manage the business risk. It would be a matter of using a simply different algorithm, built on the personal characteristics of the aged worker, who is able (through sensitivity, life experience, prudence, knowledge of processes and of operational and reputational risks) to support the worker who operates externally (and who in turn personally takes on operational risks that cannot be managed with the skills and time at his disposal). In short, new algorithms and rating systems, as negotiated by the collective parties, built and ‘adapted to man’ (according to the dictates of Directive 89/391/EEC), could enhance and oversee, not only and more than response times to ‘external cus-tomer’ stimuli, but also the quality of assistance and advice provided directly to
‘internal customer’. Furthermore, new professional figures for operational
supervision should be set up, especially in the area of ‘risk management’ in the financial sector. We are thinking of a sort of ‘MiFID II Guarantor’: a figure of widespread support, with an operational role which, in virtual side-by-side with front-line operators, could offer them contents of experience (advice and assis-tance). These figures would also provide a valuable link between the compliance function, the safeguarding customer assets function and the business function, enhancing the effectiveness of operational controls in preventive and informal management modes.
Some of the proposals for reform of European regulation outlined above emerge from the Manifesto AdessoBanca! (1), a model of social reform of the financial system promoted by First Cisl, the leader of this project.
In particular, the following further recommendations can be drawn from this Manifesto.
6 – Compliance control functions
The heads of the compliance function, appointed in accordance with regulatory requirements, should, without prejudice to the prerogatives of their function, be supported by a member representing employees and a member appointed by the supervisory authority; in the alternative, the fluid and frequent interlocution in a bidirectional sense with these different subjects should at least be guaranteed, for the purpose of protection, also in the spirit of the so-called ‘whistleblowing’.
7 – Single MiFID questionnaire for all intermediaries
Mi-FID central unit managed by the national supervisory authority. In order to ensure the effectiveness of the measure introduced by the Community legislator, the detection of savers’ risk tolerance by means of the questionnaire that inter-mediary distributors address to their customers is crucial. With respect to the correct detection by intermediary distributors of the risk profile associated with the client-savings investor, today each intermediary prepares its own set of ques-tions, representing the so-called ‘MiFID questionnaire’, without any constraint of prior approval of the set, and indeed in the absence of a standard question-naire. The first consequence of this factual situation consists in a possible differ-ent classification, in terms of risk tolerance, of the investor-savings having deal-ings with several intermediaries, also as a result of the non-homogeneous formu-lation of the questions or aggregations of questions, and consequently of the different algorithms for decoding the information, in use by the various interme-diaries. The second, potentially harmful consequence consists of risk tolerance
(1) FIRST CISL, AdessoBanca! Manifesto per la tutela del risparmio e del lavoro. Verso una riforma social-mente utile del sistema bancario, 2018.
measurements that are potentially inconsistent with the actual risk and loss tol-erance of savers-investors.
It would therefore be necessary to provide for the adoption of a single European questionnaire, or at least at the national level, according to a model developed by the supervisory authority, as well as the adoption of a single algorithm for de-coding the information taken from clients. In addition, a MiFID Central Office, managed by the supervisory authority, could be set up to allow real-time updating of the questionnaire, at a systemic level, and to impose operational stops or warn-ings in the event of significant/abnormal changes in the client’s risk profiles.
8 – Certification of the risk associated with financial instruments/products
The ‘product intervention’ consists of the possibility of intervention granted to ESMA, EBA and competent national authorities to prohibit or restrict the dis-tribution of specific financial products, or a type of financial activity or practice, deemed harmful to investors or detrimental to the orderly functioning and in-tegrity of markets or the stability of the system. According to Article 42(3) of MiFIR, the national supervisory authority may not, other than in exceptional cases, use these prerogatives until it has been communicated to the other com-petent authorities and ESMA, at least one month before the prohibition or re-striction, all the elements required. These time constraints appear frankly exces-sive, they constitute elements of procedural stickiness that should be removed ope legis, because they could make the ‘product intervention’ cumbersome, un-timely and, therefore, ineffective.
9 – Prohibition of distribution of financial instruments/products in short time intervals (so-called ‘product campaigns’)
The provisions of MiFID II require intermediaries to make a significant change in the intermediary-client relationship model, with the shift from a logic centred on the specific ‘product’ marketed to a logic centred on the ‘service’ rendered to the client, including in the area of advisory services on a non-independent basis.
The duty to direct the behaviour of intermediaries to the best interests of clients makes the so-called ‘product campaigns’, consisting of massive commercial pro-posals over a limited period of time, practically incompatible with the logic of MiFID II. In this regard, it is worth recalling that in carrying out the obligation to provide the statement of suitability in the service of investment advice on a durable medium, provided for by Article 25(6) of the Directive, it is necessary to specify “the reasons why the recommendation corresponds to the client’s pref-erences, objectives and other characteristics”. In order to prevent unfair, aggres-sive or otherwise masaggres-sive practices (which are in themselves contrary to the
principles of the so-called ‘personalised recommendation’), the best way forward is to expressly prohibit so-called ‘product campaigns’.
Also crucial and unresolved are the questions of the organisation of work in banks (which has changed, but certainly not in terms of greater protection for bank workers) and the redefinition of professional protections related to work performance: these have an impact, respectively, on the system of industrial relations and on the evolution of the law, also in view of the construction of a Community labour law. The effects of MiFID II are not limited to the response to the expectations of institutional investors and savers and, more generally, to the expectations of credibility of the financial system and market stability. MiFID II also affects: a) the current business model of the companies operating in the sector, and even more so b) the current models of labour relations and c) the structure of industrial relations in the financial sec-tor.
As for point a), banks probably need to reconsider (and clarify to their custom-ers) what kind of financial advice they intend to offer: (hopefully) also on a ‘self-employed’ basis (which can easily be carried out by employees), on a more pro-fessional basis (for which a fee is to be paid), or, again, exclusively on a ‘non-independent’ basis (which can also be carried out either as an employee or as a self-employed person). The adoption by banks of the model of independent ad-vice would offer an organizational context of greater protection for workers in the financial sector: this is due both to the (greater) breadth of the range of fi-nancial instruments that would then have to be offered to customers and, above all, because such advisory arrangements would in themselves free workers from commercial pressure to place a specific financial product. In short, independent advice could prove decisive in virtuously orienting the relationship between in-termediaries and clients, with the former also becoming true agents of financial education, in a condition of a ‘win-win’ relationship, capable in itself of generat-ing a higher degree of awareness and financial responsibility. This business choice would also require a further professionalisation of the financial interme-diaries’ staff.
With regard to point b), there is a need to ‘professionalise’ and ‘re-professional-ise’ the staff that companies want to use for consultancy in a serious and rapid manner. It is necessary to responsibly accompany ‘professional transitions’ and enhance the transversal skills of older and experienced workers, to prevent digi-talisation and MiFID II from acting as an accelerator of expulsion processes: this would in fact represent a potential detriment to clients. The ‘trained’ employees, at the end of this professionalisation phase, will assume more intense contractual collaboration duties and more stringent professional obligations compared to the status quo ante. As a result, these new ‘banking professionals’ will have to be better protected in terms of regulations (specific protections) and remuneration.
Their employment relationship, if subordinate, will tend to be formulated on the
assumption of a more intense fiduciary basis and will always be characterised by the so-called ‘intuitu personae’.
There is a first problem: how to make the transition from the old to the new professions, which require new individual protections, new classifications and appropriate pay profiles. There is a real possibility that the number of self-em-ployed workers will increase in relation to the number of emself-em-ployed workers, as well as forms of legal hybridisation between subordinate and self-employed work. In the silence of the legislator (both Community and national), practical experiments in flexibilisation or even hybridization are being carried out (often in practice only, and almost always in a non-bargaining way), either through juxta-position formulas, where the element of subordinate work is represented by part-time work (horizontal or vertical), or through real hybrids, i.e. working arrange-ments that co-inject different elearrange-ments, even from so-called ‘flexible work’ or remote work. These regulatory aspects must certainly be carefully assessed and managed by both the Community legislator and the collective partners (at the highest possible level), and should not be left to the autarchy and regulatory power of companies. The protection of savers goes hand in hand with the pro-tection of professional and responsible work, and this (social and legal) respon-sibility can be more clearly attributed to the banking company when it imple-ments the use of employees in the consultancy service.
As for point c), it is clear that governing these complex processes of adapting the way companies organise their work requires a system of industrial relations that is mature and open to social dialogue and the extension of collective bar-gaining to the issue of work organisation. In practice, this means rewriting (to-gether: employers and trade unions) the rules of the game: from collective labour agreements (giving greater importance to bilateral bodies for shared management of processes, professional training, professional protection, and grading) to new working methods, anticipating or complementing the work of the EU legislator, who is currently engaged in the (laborious) definition of only marginal aspects of digitalisation (e.g. work in and on digital platforms, which only incidentally touches on the more delicate aspects of financial advice). For workers in the financial sector, the necessary and desired reform of Community labor law passes through the reform of the MiFID II and postulates a shared, nomopoietic respon-sibility of the social partners and the Community legislator, in the exercise of a new and broader Lamfallussy procedure.
MiFID II regulation of the markets came into force (throughout the Union) on 3 January 2018; MiFID II of the social partners, on the other hand, still has no agenda or even self-awareness.