Riding the regulatory avalanche: a strategy for a new world Charles Muller KPMG Luxembourg EMEA CoE Investment Management Regulation

Riding the regulatory avalanche: a strategy for a new world Charles Muller KPMG Luxembourg EMEA CoE Investment Management Regulation EU Commission p...
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Riding the regulatory avalanche: a strategy for a new world Charles Muller KPMG Luxembourg EMEA CoE Investment Management Regulation

EU Commission priorities: before the crisis

Investor Information and Protection

Efficiency

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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EU Commission priorities: after the crisis

Investor Information and Protection

Financial Stability

Sanctions

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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A new decision making tree

G20

FSB

EU

ESMA

National regulators

Member States

Global

Regional

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

IOSCO

Local

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The squeeze of the asset manager

owner

owner

client

Bank

distributor

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Asset manager

client

Insurance

distributor

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The squeeze of the asset manager

Liikanen / Volcker rule owner

owner

Basel /CRD /Solvency Bank

Asset manager

client

client

Insurance

MifiD / IMD distributor

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

distributor

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EU

Global

Key regulatory developments in 2013 and beyond

FSB Shadow Banking

BCBS RWA

EC EMIR level 2 measures Banking Union SSM in force MAD/MA R trialogue

NATIONAL

FSB GSIB list

G20 Leaders Russia

Basel 3 capital in force

FSB GSIB surcharge in force

FSB GSIBs fully in force Basel 3 liquidity in force

EMIR reporting EBA RRP in force RTS MiFID2 PRIPS / EMIR EBA in force IMD level initial ESMA MEP RRD Banking stress 2 margin in CSD ITS Shadow trialogues Union fully Solvency testing force Banking EMIR in force 2 in force EC Shadow vote Audit clearing ESMA Shadow Banking in reform AIFMD MiFID2 obligation Banking PRIPs in force proposals national level 2 EBA EC UCITS EC LIBOR force CRD4 implement Banking CRD4 6 proposals Union EBA Home / EC ESA Regulatio IMD in n in force SRA in CRD4 / Host ITS review CRA RTS force place CRR ITS MiFID2 CRD4 consult final MEP ESMA Directive vote Short

PRIPS / EC data IMD MEP protection vote proposals Banking EMIR in force Union RRD MEP DGS vote proposals EC FTT EC MiFID2 proposal Liikanen Council update agreemen t CRD4

AIFMD final text

MEP vote EBA Mortgage guidelines

UCITS 5 MEP vote

selling

CFTC swap in force

US DFA mandator y clearing

France FTT

Jan 2013

G20 Finance Russia

BCBS trading book

FSB review of GSIBs

BCBS shadow banking update

FR – Bank separation proposal

Feb

Mar

DE – Bank separation proposal

UK Vickers in force

FCA/PRA

CFTC swap in force

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

2014

Dec

2014

2015

2016

2017

Systemic risk and capital buffers

In force

Governance and supervision

Consultation

2018

2019

Customers and markets © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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Matrix - How do the various regulatory initiatives impact the business? Service

KYC retail Profs

Regulation UCITS



AIFMD



PRIPs



  



MiFID review Short selling

Liquidity Fund Marketing mgt managing

R&D



Derivatives Investment Risk trading/ services mgt short selling













Investor Compensation Schemes Directive





Depositary regime review





FATCA







































































 













EU Venture Capital

































CRD IV



Solvency II



FTT



© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

 







 















 













IT



EuSEF

SLD



TAX







Dodd-Frank





Credit rating agencies



 



Remuneration

Accounting





OTC Derivatives/ EMIR

Internal process Portfolio Depositar Compliance mgt y









  







 7

AIFMD

AIFMD – Estimated Timeline

ESMA technical advice on Delegated Acts (“level II”) (16 November 2011)

Publication in the Official Journal (1 July 2011)

Strategic analysis

Sept 2011

>> >> Nov 2011

Implementation July 2012 2013

>>>>>

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Authorisation and ongoing compliance

July 2014

Passport AIFMD draft introduction for EU law was AIFMs deposited in managing EU AIFs Luxembourg Parliament Deadlines for responses on ESMA EU Commission consultations issues Delegated Regulation (19 December 2012)

Possible withdrawal of national PPRs on ESMA’s advice

EU passport available nonEU AIFMs and non-EU AIFs

YOU ARE HERE

Entry into Force (21 July 2011)

July 2011

Deadline for authorisation Deadline for of existing transposition AIFMs into EU national laws

July 2015

Oct 2015

Oct 2018

Jan 2019

ESMA opinion on the passport regime for non-EU funds and managers

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Impact AIFMD

■ Cash flow monitoring ■ Monitoring role and custody ■ Liability

Depositary

■ Markets and instruments

■ Illiquid assets, actual riskprofile and risk management tools ■ Results of stress tests ■ Leverage ■ Systemic risk information

■ Externally managed: EUR 125.000 when more thanEUR 250 mln AUM, 0,02% over this, capped on EUR 10 mln

y Transparency r o t a l u Capital g requirements e R

Risk and Liquidity management

Objective reasons No letterbox entity Co-operation agreement Monitoring role manager

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

■ Includes senior staff incl. Senior management, portfolio manager and functions with an impact on risk profile

Remuneration L e g a l

AIFMD Conflict of interest

Delegation

■ ■ ■ ■

■ Functionally and hierarchically separate ■ Due diligence investments ■ Limits on leverage ■ Stress tests

R i sk mon i t o r i ng

Valuation

■ Multi year framework, and variable elements, at least 40% deferred over 3 to 5 yrs

■ Policy

■ Guarantees for independent valuation ■ Functional independent from portfoliomanagement

Processes

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AIFMD - Level II Impact

■ Content of annual report ■ Disclosure to investors ■ Reporting to competent authority ■ Calculation of leverage ■ Leverage on a substantial basis ■ Cooperation arrangements ■ Mechanisms, instruments and procedures ■ Data protection safeguard ■ ■ ■ ■

■ ■ ■ ■

Calculation of the AuM Monitoring of AuM Occasional breaches Additional own funds and professional indemnity insurance

■ Scope of financial instruments ■ Cash-flow monitoring ■ Oversight ■ Safe-keeping ■ Loss of financial instruments ■ Discharge of liability

Transparency Depositary

Third country rules

Delegation

AIFMD

Level II Scope and Authorisation

General principles Due-diligence Conflicts of interest Organisational structure

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Business conduct

Valuation

Risk and liquiditymanagement

■ ■ ■ ■ ■

Objective reasons Features of the delegate Conflicts of interest Sub-delegation Letterbox entity

■ ■ ■ ■

Policy Review Frequency of valuation Professional guarantees

■ Functional and hierarchical separation ■ Permanent risk management function ■ RM & LM policies ■ Risk limits ■ Safeguards 11

UCITS 5 and 6 Shadow banking

UCITS 5 • Depositary duties and liability • Managers’ remuneration • Sanctions On 3 July 2012, the

Address perceived failings

European Commission decided

to address these issues in publishing a revision of UCITS –

UCITS V as part of a wider consumer retail package including

Address delegation and liability issues for depositaries

Improve investor protection

PRIPS & IMD II.

Set-up pecuniary & administrative sanctions © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Align UCITS rules with the AIFMD 13

Shadow banking

Commission issued green paper on shadow banking in March 2012 focus on ETF/ MMF/ SPV / Securitization…

global discussion on money market funds: IOSCO consultation followed by IOSCO guidelines issued on 9 October 2012 Eligible asset discussion FSB consultation on recommendations issued on 18 November 2012

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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UCITS 6 - Consultation document issued by the Commission in July 2012 - Targeted issues: 1) ELIGIBLE ASSETS AND USE OF DERIVATIVES 2) EFFICIENT PORTFOLIO MANAGEMENT (EPM) 3) OTC DERIVATIVES

4) EXTRAORDINARY LIQUIDITY MANAGEMENT TOOLS 5) DEPOSITARY PASSPORT

6) MONEY MARKET FUNDS 7) LONG-TERM INVESTMENTS

8) UCITS IV IMPROVEMENT - Simultaneously published: ESMA Guidelines on UCITS ETFs, ESMA’s reply to EC’s Green Paper on Shadow Banking

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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MIFID

Structured UCITS are out of the scope of the Execution Only Exemption MiFID II

Under MiFID II, some UCITS are seen as complex.

Certain UCITS have become more complex, especially « structured UCITS ». According to Regulation 583/2010, « structured UCITS » are UCITS which provide investors at certain predetermined dates, with algorithm-based payoffs that are linked to the performance, or to the realization of price changes or other conditions, of financial assets, indices or reference portfolios or UCITS with similar features. Regulation 583/2010 implements the provisions of the UCITS IV Directive regarding Key Investor Information.

Therefore, MiFID II confirms the general classification of UCITS as non-complex instruments but it introduces the exception of « structured UCITS » which will be classified as complex instruments. The consequence is that investment firms will have to apply the appropriateness test when they sell “structured UCITS”.

Non-complex instruments

« execution-only » regime

Complex instruments – Structured UCITS

common MIFID regime

no appropriateness test

UCITS

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

appropriateness test

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Independent advisors cannot receive any third party inducements MiFID I: Firms are currently prohibited from making or receiving payments or other non-monetary benefits in connection with any investment or ancillary services provided to professional clients or retail clients An exemption for third-party inducements is available where (i) clear, prior disclosure of the inducement has been made to the client, (ii) the inducement has been designed to enhance the quality of the service to the underlying client of the firm, and (iii) the payment or benefit does not impair compliance with the firm’s duty to act in the client's best interests

MiFID II Art 24: First case: The Investment firm informs the client that investment advice is provided on an independent basis (Art. 24 (5)). Bans third party inducements altogether

Second case: The Investment firm provides portfolio management (Art. 24 (6)). Bans third party inducements for a firm providing independent advice

Third case: The Investment service is offered with another service or product as part of a package (Art. 24 (7)). Information disclosed to the client whether it is possible to buy the different component separately. The firm shall also provide for a separate evidence of the costs and charges of each component.

Will be addressed by Level II: A modification of the disclosure requirement to require detailed prior disclosure, abolish the possibility of disclosing inducements in summary form and introduce an ex-post reporting obligation. Clarifying the technical details to be disclosed and defining templates in order to harmonise the disclosures to clients. © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

18

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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PRIPS

PRIPS

Background  Investor protection:

Investor protection

Retail investment products can be complex and difficult to compare or fully grasp the risks

involved and consequence of taking unexpected risks and facing consequent losses can be devasting for retail consumers  Lack of transparency: The information that is available to retail investors can be overly laden with jargon, complex and

difficult to use for comparisons between different investment products  Objectives: a) Retail investors should be able to understand the key features and risks of retail investment products and to compare the features of different products

b) Ensuring a level playing field through harmonisation of the product disclosure rules for all

investment products (banking, insurance, fund products)

b) Complement investor protection measures on investment advice and sales services included in MiFID II and IMD II

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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PRIPS

Scope Packaged Retail Investment Products

 Investment Product: Any investment where the amount repayable is exposed to fluctuations in reference values or in

the performance of the asset(s)  Packaged: Wrapping’ of assets or other mechanisms (e.g. capital pooling, derivative instruments) – no direct holding

COVERED

NOT COVERED

structured products investment funds

shares and bonds (direct holding) deposits (determined by interest rate)

insurance products derivative instruments pension products © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

occupational pension schemes pensions products required by law

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PRIPS

Responsibilities regarding the Key Information Document (KID) Responsibility to produce the KID: Responsibility

Product manufacturer a) person who produced the investment product b) person who substantively changed the risk or cost structure

Delegation

Obligation to provide KID to investors: Seller a) distributor b) manufacturer (in case of direct sale)

Timing: «good time»

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

BEFORE sales transaction

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PRIPS

Form and Content of KID

Form and Content

KEY INFORMATION DOCUMENT “This document provides you with key information about this investment product. It is not marketing material. The information is required by law to help you understand the nature of this investment product and the risks of investing in it. You are advised to read it so that you can take an informed decision about whether to invest.“

Name of investment product & identity of manufacturer What is this investment ?

Could I lose money ? What is it for ? What are the risks and what might I get back ?

What are the costs ? How has it done in the past ?

What might I get if I retire ?

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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