Complaints Handling is one of the many areas the European legislator focused on to improve Investor Protection across the EU. While the changes in primary legislation are marginal, the devil is in the detail and firms need to make sure they comply if they want to avoid a massive headache coming from those rule changes.
MiFID v. MiFID 2
Investor Protection is one of the key areas the MiFID 2 review focused on and the previous rules regarding Complaints Handling were considered to superficial. The original MiFID rules only instructed the different member states to set up rules in their implementing legislation that provided for a high-level framework. Such legislation required investment firms to establish, implement and maintain effective and transparent procedures for the reasonable and prompt handling of complaints received from retail clients or potential retail clients, and to keep a record of each complaint and the measures taken for its resolution.
While this automatically left room for different interpretation by national legislators, it was also considered to be not detailed enough in itself with respect to the concrete steps firms should take.
Under MiFID 2 the framework essentially remained the same in respect of Level 1 legislation. The main difference come from secondary legislation in the form of delegation to the European Supervisory Authorities (“EASs”), in particular the European Security and Markets Authority (“ESMA”). Following a consultation, ESMA in December 2014 produced technical advice on the subject that outlined the requirements for the setup and procedure of complaints handling.
The seven requirements
- Complaints Management Policy
Investment firms shall establish and maintain a complaints management policy for clients or potential clients. The complaints management policy shall provide clear, accurate and up-to-date information about the complaints-handling process. This policy shall be endorsed by the firm’s management body.
- Reporting of Complaints
Investment firms shall publish the details of the process to be followed when handling a complaint. Such details shall include information about the complaints management policy and the contact details of the complaints management function. This information shall be provided to clients or potential clients, on request, or when acknowledging a complaint. Clients and potential clients should be able to submit complaints free of charge.
- Complaints Management Function
Investment firms shall establish a complaints management function which enables complaints to be investigated. This function may be carried out by the compliance function.
- Client Communication
Investment firms shall communicate to clients in plain language that is clearly understood and provide a response to the complaint without any unnecessary delay.
- Alternative Dispute Resolution
Investment firms shall explain to the client or potential client the firm’s position on the complaint and set out the client’s or potential client’s options, where relevant, that they may be able to refer the complaint to an Alternative Dispute Resolution (ADR) entity or that the client may be able to take civil action.
- Complaint Reporting
Investment firms shall provide information on complaints and complaints-handling to the relevant NCA and where applicable under national law, an ADR entity.
- Ongoing analysis and obligations
Investment firms’ compliance functions shall analyse complaints and complaints-handling data to ensure that they identify and address any risks or issues.
Further considerations
These present the official requirements that were adopted in Article 26 of the Commission Delegated Regulation C(2016) 2398 of 25 April 2016 (https://ec.europa.eu/transparency/regdoc/rep/3/2016/EN/3-2016-2398-EN-F1-1.PDF ), but it is also important to bear ESMA’s considerations in mind regarding the replies it had received on its consultation paper and why it decided on this basis to come up with the technical advice as it was. For instance, ESMA made it clear that though it had received some pushback from market participants, it feels that in the interests of investor protection the complaints-handling requirements should apply to all clients and not only retail clients, so it includes professional clients, too. ESMA also noted that the complaints guidelines developed together with the European Banking Authority considers a complaint should be defined as a statement of dissatisfaction addressed to a firm by a client or potential client relating to the provision of investment services. ESMA highlighted this because it thinks that this concept can prove useful in the application of proposed requirements. ESMA further added that with regard to “details” of the complaints-handling process, these should include the firm’s internal procedures for dealing with complaints, the contact details of the relevant person/staff who will be dealing with the complaint. With regard to compliance performing the function of complaints management function, the regulator clarified that it is particularly suited to perform these tasks and also notes that allowing the complaints management function to be carried out by the compliance function is, especially for small firms, in line with the general principle of proportionality. Furthermore, ESMA considered that, as clarified in paragraph 3(iv) of its technical advice on the ‘compliance function’, the compliance function shall consider complaints as a source of relevant information in the context of its general monitoring responsibilities. On the issue of endorsement by the management body, ESMA felt that it is important that this body has clear oversight of how the firm proposes to handle complaints. Furthermore, by requiring such endorsement at this level ESMA aimed to ensure that the complaints management policy will be of a high quality and robust nature in order to effectively manage any complaints received.
While these considerations might be regarded rather as soft rules, it is important for firms to keep them in mind in order to set up a sufficient framework.
National Regulation
While the Regulation will be directly applicable and does not require any implementation into national law as such like a directive, national regulators still seek to add the new legislation to their existing rulebook in ways that ensure consistency of the whole text. It would go beyond the scope of this article to discuss the ramifications for every single member state of the EU, but looking at the example of the UK’s FCA, the process of revision of national becomes clearer. In July 2016, the FCA has issued consultation paper CP16/19 in respect of the MiFD2 Implementation. The consultation covers a wide range of subjects and with regard to Complaints Handling it proposes copying out directly the requirements in MiFID 2 into its Dispute Resolution: Complaints sourcebook (DISP), which forms part of the full FCA Handbook. In doing so, it would create and a new section which will contain all the complaint handling requirements for MiFID complaints. The FCA is currently in the process of considering the feedback it has received and will publish rules in a Policy Statement over the coming months.
If you want to find out about the details regarding the amendments of the laws of other member states, consult the respective national regulators.
Conclusion
What at first sight may seem insignificant can often develop into a serious issue if not dealt with outright. The same applies for the new rules on Complaints Handling, so it’s important to get to grips with it as soon as possible. Keeping in mind the seven steps presented above plus the additional considerations as outlined by ESMA, this hopefully should not be too difficult.