Statement by the Polish Financial Supervision Authority on the Role of its Positions in Brokerage Services

FINANCIAL SUPERVISION COMMISSION
Chairman
Andrzej Jakubiak
Warsaw, December 6, 2015
DRK/WK/485/tf/ / /2015/MT

Dear Madam
Dear Sir

President of the Management Board
Securities House
Director
Brokerage Office
Organizational unit of a bank conducting brokerage activities Branch Foreign Investment Firm

according to the distribution list

Taking into account the objectives of supervision over the financial market, as specified in Article 2 of the Act of 21 July 2006 on supervision over the financial market (Journal of Laws of 2015, item 614, as amended, hereinafter: the Act), such as ensuring the proper functioning of the market, including its stability, safety, and transparency, trust in the market, as well as ensuring the protection of the interests of its participants, and the tasks of the Financial Supervision Commission specified in Article 4(1) points 2 and 4 of the Act, consisting inter alia in taking actions serving the proper functioning of the financial market and educational and informational actions, I would like to draw your attention to the role played by the positions of the Office of the Financial Supervision Commission in the process of providing brokerage services by investment firms.

The purpose of the Office's positions is to ensure the proper functioning of supervised entities, particularly in the area of client interest protection. The positions contain explanations and remarks regarding observed practices of investment firms and the interpretation of applicable legal provisions.

Several functions performed by the positions can be distinguished.

Firstly, the positions prepared by the Office allow for a better understanding of the regulatory environment, which consequently facilitates the preparation and implementation of changes in existing practices regarding the provision of brokerage services, particularly in the area of protecting the best interests of investment firms' clients. The above note retains its relevance within legislative changes resulting from the implementation of European Union law. An example of a position realizing the above goal is the position regarding the conditions for accepting and transferring monetary and non-monetary benefits (so-called incentives) by investment firms, dated August 5, 2011, ref. DFL/023/182/1/1/69/11/MK.

Another objective of the KNF positions is to indicate to supervised entities the proper way of fulfilling obligations imposed by legal provisions. The positions therefore contribute to the dissemination of a uniform way of understanding and performing administrative obligations, which supports the realization of one of the KNF's operational goals - market safety. The practice of preparing positions also promotes the preservation of principles of equal competition among supervised entities. It limits the possibility of investment firms obtaining unauthorized benefits due to non-compliance with legal provisions. An example of a position realizing the above functions is the position regarding the conduct of investment firms in the Forex market, dated July 17, 2013, ref. DRK/WRM/485/55/1/55/2013/PT, where attention was drawn, inter alia, to the standard of information transfer to the client or the assessment of the appropriateness of brokerage services and financial instruments.

Furthermore, the Office's positions indicate necessary directions for changes in the operating models of investment firms. This issue was highlighted in the KNF position regarding the provision of investment advisory services by investment firms, dated March 27, 2012, ref. DRK/023/27/5/V/14/2012/PT. The document discussed the premises allowing one to consider that a service provided by an investment firm has the character of an investment advisory service, as well as presented numerous examples of situations in which an investment firm provides a service referred to in Article 69(2) point 5 of the Act on Trading in Financial Instruments (Journal of Laws of 2014, item 94, as amended) in violation of applicable rules.

In the positions, the Office also points out potential risk factors regarding activities conducted by investment firms. Realizing the protective function of the law, the Office counteracts the materialization of risks.

The above-described characteristics of the positions indicate that they contribute to a better understanding of legal regulations, both already in force and newly created, by supervised entities. It should be emphasized that these regulations should be taken into account in the daily functioning of investment firms. The KNF positions also allow supervised entities to familiarize themselves with the Office's practice of applying the law and the KNF's expectations regarding the conduct of investment firms in compliance with the law. It should be noted that acting in accordance with the positions transmitted by the Office minimizes the risk of a supervised entity being accused of violating the law, and consequently, of the authority applying appropriate supervisory measures. The view that knowledge of KNF positions positively influences the observance of administrative obligations by supervised entities also seems fully justified.

At the same time, the Office informs that the preparation of this letter was preceded by the practice observed by the KNF of not taking into account the positions of the supervisory authority in the activities of investment firms. During the BION process for securities houses and conducted inspections, the Office identified a disturbing phenomenon of investment firms intentionally refraining from analyzing the impact of the Office's positions on their conducted activities and the lack of adaptive actions to legal provisions that were the subject of KNF positions. The lack of activity by the Supervision Inspector, the Management Board, or the Supervisory Board in this area may indicate a lowered compliance culture in the enterprise, and the violation of provisions analyzed in the KNF positions may be the basis for initiating appropriate supervisory proceedings.

At the same time, I remind you that since 2011, the following positions of the Office related to the performance of activities by investment firms have been issued in particular:

1. Conditions for accepting and transferring monetary and non-monetary benefits (so-called incentives) by investment firms, (dated August 5, 2011, ref. DFL/023/182/1/1/69/11/MK).
2. KNF Position regarding the provision of investment advisory services by investment firms, (dated March 27, 2012, ref. DRK/023/27/5/V/14/2012/PT).
3. KNF Position regarding the conduct of investment firms in the Forex market, (dated July 17, 2013, ref. DRK/WRM/485/55/1/55/2013/PT).
4. Supplementary KNF Position regarding the provision of investment advisory services by investment firms, (dated September 3, 2013, ref. DRK/WRM/485/7/7/69/2013/MK/PT).
5. KNF Position regarding the functioning of the compliance system within investment firms, (dated May 27, 2014, ref. DRK/WRM/485/60/1/2014/MK).
6. KNF Position regarding the holding of client funds by investment firms, (dated April 23, 2015, ref. DRK/WRM/485/32/1/MK/25/2015).
7. KNF Position regarding the required level of margin deposit for a financial instrument, (dated July 21, 2015, ref. DRK/WRM/485/33/4/2015/46/PT).

Sincerely,

CHAIRMAN