1. Purpose and scope
FRMC as management company under Chapter 15 of the Law of 17 December 2010 as amended from time to time, and AIFM under Chapter 2 of the Law of 2013 as amended from time to time, shall ensure that itself and its delegates do not receive fees that would be undue to their activity or could jeopardise their independence (CSSF Regulation 10-04, article 32; Commission Delegated Regulation 231/2013, article 24).
In addition, both the Grand-Ducal Regulation of 30 May 2018 and the CSSF Circular 18/698 clarify that the MiFID II “product governance regime” applies to the product development and sales processes of Management Companies where product governance regimes differentiates between requirements targeting product manufacturers and product distributors.
Other Luxembourg regulatory texts:
- Law of 30 May 2018 « relative aux marchés d’instruments financiers »;
- EU Commission Recommendation 2009/384/EC of 30 April 2009 on the remuneration policies in the financial sector;
- UCITS V Directive: Directive 2014/91/EU;
- ESMA guidelines ESMA/2013/232;
- ESMA guidelines 2015/ESMA/1172;
- ESMA guidelines ESMA/2016/411.
- Directive 2014/65/EU on markets in financial instruments;
- Commission Delegated Directive (EU) 2017/593; and
- Commission Delegated Regulation (EU) 2017/565.
The Policy is subject to annual review and update by the Management Committee and the Compliance Officer of FRMC.
2. Key Principles
FRMC shall not be regarded as acting honestly, fairly and in accordance with the best interests of the funds it manages or the investors in these funds if, in relation to the activities performed when carrying out its functions, it pays or is paid any fee or commission, or provides or is provided with any non-monetary benefit, other than the following:
- A fee, commission or non-monetary benefit paid or provided to or by the fund, or a person on behalf of the fund;
- A fee, commission or non-monetary benefit paid or provided to or by a third party or a person acting on behalf of a third party, where the following conditions are satisfied;
i - the existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained on an ex-ante basis, the method of calculating that amount must be clearly disclosed in a manner that is comprehensive, accurate and understandable, prior to the provision of the relevant service; and
ii - the payment of the fee or commission, or the provision of the non-monetary benefit must be designed to enhance the quality of the relevant service and not impair compliance with the management company’s duty to act in the best interests of the fund. - Proper fees which enable or are necessary for the provision of the relevant service, including custody costs, settlement and exchange fees, regulatory levies or legal fees, and which, by their nature, cannot give rise to conflicts with the management company’s duties to act honestly, fairly and professionally in accordance with the best interests of the fund.
- Acceptable minor non-monetary such as disclosed in Appendix 1. The Disclosure of minor non-monetary benefits shall be made prior to the provision of services to clients through the reference of the inducement policy available on FRMC’s website.
In addition, FRMC does not receive or provide research services in any manner. In this respect, no inducements, nor non-monetary benefit can be qualified under the research services
The disclosure of the essential terms of the arrangements relating to the fee, commission or non-monetary benefit in summary form shall be considered as satisfactory for the purposes of point (i) of paragraph b), provided that FRMC commits to disclose further details at the request of the investor in the fund it manages and provided that it fulfils this commitment.
FRMC shall ensure full transparency over the fee structure that constitutes its benefits. FRMC shall also contractually ensure its delegates apply the same transparency with investors, and monitor this as part of its oversight duties
3. Responsibilites
Minimum principles to be respected:
- Any new monetary or non-monetary benefit paid or received by FRMC or its delegates shall be identified and classified as proper fees or inducements;
- Any benefits identified as inducements shall comply with these criteria and terminate non-compliant agreements;
- Such classification and assessment must be sufficiently documented.
Other topics are closely related to inducement such as ‘gifts and entertainments’ and ‘conflicts of interest’ or, related to a same domain i.e. rules of conduct. It is recommended to get familiar with the relevant policies in order to have a wider picture.
Senior management
Senior management shall ensure that adequate arrangements are in place both at FRMC level and at delegates’ level via its oversight processes to comply with this policy.
The Policy consists of all measures, actions and options decided in order to limit risks to an acceptable level in pursue of FRMC’s global objectives.
Compliance function
- Compliance will ensure FRMC has appropriate organization and procedures to comply with its regulatory framework;
- Compliance will ensure that new rules concerning inducements are analysed and communicated to the teams in charge of delegate oversight;
- Compliance shall ensure that the FRMC fee structure abides by the same principle by giving its opinion on the pricing framework;
- Compliance shall ensure effectiveness of the controls by the FRMC oversight teams on the implementation of the relevant policy requirements by appointed delegates.
Oversight teams
FRMC team managers are responsible for defining procedures of oversight that fit legal requirements and compliance advice and for escalating any breach detected to the management committee, compliance function and the respective fund’s board.
A particular focus must be brought in relation to entities that fall under the definition of investment firms under MIFID.
4. Impacted processes
- FRMC Level
Inducement received: In order to maintain an independent service level, FRMC does not receive any inducement.
Inducement paid: In order to maintain an independent service level, FRMC does not pay any inducement.
As per Appendix 1. the following non-monetary benefits are acceptable and pre-approved by Management:
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- Participation in conferences, seminars and other training events;
- hospitality of a reasonable de minimis value, such as food and drink during client events, business meetings, conferences, seminars or the training events mentioned above;
- Delegate Level
Inducements mainly impact the processes of portfolio management, global distribution and fund administration. All those functions are usually delegated by FRMC.
As a consequence, FRMC, via oversight should ensure:
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- A clear description of the fees and commissions received / paid by / to the FRMC and to the delegates;
- Specific questions in the DDR / ECR / ACC processes to ensure that appropriate disclosures are made through policies, prospectus or alternative media (e.g. website);
- Existence of a Gift & Entertainment (“G&E”) policy and of a corresponding G&E log is a measure contributing to detect undue inducements.
- The existence and adequacy of the fee structures for all delegates;
- The controls over the fees and non-monetary benefits;The fees and non-monetary benefits do not create sustainability risks;
- Records management over the fees and non-monetary benefits (acceptable non-monetary benefits received, rationale for absence of conflicts of interest);
- The existence, nature and amount (or method for calculation) of the fees or non-monetary benefits is clearly disclosed to the client, in a manner that is comprehensive, accurate and understandable.
Appendix 1
As per Commission Delegated Directive EU 2017/593The following benefits shall qualify as acceptable minor non-monetary benefits only if they are:
(a) Information or documentation relating to a financial instrument or an investment service is generic in nature or personalised to reflect the circumstances of an individual client;
(b) Written material from a third party that is commissioned and paid for by a corporate issuer or potential issuer to promote a new issuance by the company, or where the third party firm is contractually engaged and paid by the issuer to produce such material on an ongoing basis, provided that the relationship is clearly disclosed in the material and that the material is made available at the same time to any investment firms wishing to receive it or to the general public;
(c) Participation in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service;
(d) Hospitality of a reasonable de minimis value, such as food and drink during a business meeting or a conference, seminar or other training events mentioned under point (c); and (e) other minor non-monetary benefits which a Member States deems capable of enhancing the quality of service provided to a client and, having regard to the total level of benefits provided by one entity or group of entities, are of a scale and nature that are unlikely to impair compliance with an investment firm's duty to act in the best interest of the client;
(e) Other minor non-monetary benefits which a Member States deems capable of enhancing the quality of service provided to a client and, having regard to the total level of benefits provided by one entity or group of entities, are of a scale and nature that are unlikely to impair compliance with the firm’s duty to act in the best interest of the client.
Acceptable minor non-monetary benefits shall be reasonable and proportionate and of such a scale that they are unlikely to influence FRMC's behaviour in any way that is detrimental to the interests of the relevant client. In case of doubt, FMC employee shall seek confirmation with Regulatory Compliance.
