TISA Conference MiFID II. Tuesday 30 June 2015

TISA Conference – MiFID II Tuesday 30 June 2015 Contents Page 1. MiFID II an overview 2–8 2. Investment Advice 10 - 12 3. Independence 14 - 1...
Author: Mark Davidson
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TISA Conference – MiFID II

Tuesday 30 June 2015

Contents

Page 1. MiFID II an overview

2–8

2. Investment Advice

10 - 12

3. Independence

14 - 15

4. Suitability

17 - 19

5. Complex/non-complex and appropriateness

21 - 23

6. Inducements

25

7. Costs and charges

27

8. Product governance

29

9. Role of the management body

31 - 32

10. Compliance

34

11. Gold plating and national discretion

36

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

2

2. MiFID II: An Overview

MiFID II – background and context

The Markets in Financial Instruments Directive (MiFID) is the framework of European Union (EU) legislation for:

 Investment intermediaries providing services to clients in relation to shares, bonds, units in collective investment schemes and derivatives (collectively ‘financial instruments’); and  The organised trading of financial instruments. The Directive sets out conduct of business and organisational requirements for investment firms, authorisation requirements for regulated markets, regulatory reporting to avoid market abuse, trade transparency obligations for shares, and rules on admission of financial instruments to trading. MiFID was applied in the UK from 1 November 2007 and has been in force for over six years, it is seen as a cornerstone of the EU’s regulation of financial markets and seeks to improve the competitiveness of EU financial markets by creating a single market for investment services and activities, and ensuring a high degree of harmonised protection for investors in financial instruments. MiFID is now being comprehensively revised to improve the functioning of financial markets in light of the financial crisis and to strengthen investor protection. It is currently anticipated the changes will take effect from 3 January 2017. On 20 October 2011, the European Commission (EC) adopted a legislative proposal for the revision of MiFID. The proposals take the form of a revised Directive and a new Regulation, which together are commonly referred to as ‘MiFID II’. The new proposals are designed to take into account developments in the trading environment since the implementation of MiFID I in 2007, including advances in technology and gaps in transparency to investors and regulators. It is also a response to the financial crisis. MiFID II is a Directive, but MiFIR is a Regulation. Most, and potentially all, of the implementing measures will be regulations. The difference being that Directives have to be transposed into national law, whereas Regulations are directly binding and Member States have to remove domestic provisions which conflict with the regulations.  The Directive – amends existing provisions on authorisation, conduct of business and organisational requirements for providers of investment services. These rules aim at strengthening the protection of investors, through the introduction of new requirements on product governance, independent investment advice and cross-selling, the extension of existing rules to structured deposits and the improvement of requirements in several areas, including – on the responsibilities of management bodies, inducements, information and reporting to clients, remuneration of staff and best execution. It also specifies requirements in relation to authorisation and the organisational rules applicable to different types of trading venues, among them a specific new type of trading venue, designed to cater specifically for SME issuers, and to providers of market data and other reporting services, as well as the powers to be granted by Member States to national competent authorities, including the sanctions for breaches of rules. In addition, the Directive contains the new regulatory tools intended to improve supervision;  The Regulation – sets out requirements on: the disclosure of data on trading activity to the public and transaction data to regulators and supervisors; the mandatory trading of derivatives on organised venues; product intervention powers to supervisors at EU and national level; removing barriers between trading venues and providers of clearing services to ensure more competition; and specific supervisory actions regarding positions in derivatives. MiFID II should not be underestimated – it is a wide ranging piece of legislation, and, depending on business model, could affect a wide range of a firm’s functions – from client services to IT and HR systems.

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

4

The financial instruments covered within the scope of MiFID are:

         

Transferable securities; Money market instruments; Units in collective investment undertakings; Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be physically settled or in cash; Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event); Options, futures, swaps, and an other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF; Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be phyiscally settled not otherwise mentioned in (6) and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls; Derivative instruments for the transfer of credit risk; Financial contracts for differences; and Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned above, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

5

MiFID activities – Am I in scope?

MiFID activities against the Regulated Activities Order: MiFID Activity

Broadly equivalent UK regulated activity

Receipt and transmission of orders in relation to one or more financial instruments

Arranging deals in investments

Execution of orders on behalf of clients

Dealing as agent

Dealing on own account

Dealing as principal

Portfolio management

Managing investments

Investment advice

Advising on investments

Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis

Dealing as principal Dealing as agent

Placing of financial instruments without a firm commitment basis

Dealing as agent Arranging deals in investments

Operation of MTFs

Operating an MTF

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

6

MiFID Ancillary services – am I in scope (part 2)

MiFID ancillary services against the Regulated Activities Order. MiFID Ancillary Activity

UK regulated activity

Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management

Safeguarding and administering investments Sending dematerialised instructions Agreeing to carry on regulated activities

Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction

N/A

Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings

Dealing as principal Dealing as agent Arranging deals in investments Agreeing to carry on regulated activities

Foreign exchange services where these are connected to the provision of investment services

Dealing as principal Dealing as agent Arranging deals in investments Advising on investments Agreeing to carry on regulated activities

Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments

Advising on investments Agreeing to carry on regulated activities

Services related to underwriting

Arranging deals in investments Advising on investments Agreeing to carry on regulated activities

Investment services and activities as well as ancillary services of the type included under Section A or B of Annex I related to the underlying of the derivatives included under Section C -5,6,7 and 10 – where these are connected to the provision of investment or ancillary services

Dealing as principal Dealing as agent Arranging deals in investments Operating an MTF Managing investments Advising on investments Agreeing to carry on regulated activities

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

7

Overview of MiFID II

Since its implementation in 2007, MiFID has been the cornerstone of capital markets regulation in Europe. Since its inception, however, not all benefits have fed down to the end investor. MiFID II aims to address the shortcomings of the original Directive and to respond to lessons learned during the financial crisis. MiFID II is composed of: 1. MiFIR: A regulation addressing issues related to transparency and market infrastructure 2. MiFID II: A directive addressing issues related to business conduct

Transparency Investor Protection

Transaction Reporting

Authorisation, Branches & Passporting

MiFID II combined with EMIR completes the European response to the G20 commitment made in Pittsburgh in 2009 (and repeated in Washington in 2011) to manage the risks associated with OTC derivatives trades.

MiFID II/ MiFIR

Data Publication & Access

Commodity Derivatives

Market Infrastructure, Trading and Clearing

Governance

2014

3 July 2015 delayed Draft Technical Standards submitted by ESMA on various matters

22 May 2014 ESMA publish DP & CP

19 Feb 2014 Final texts published for national consideration

3 Jan 2016 Guidelines developed by ESMA on management body, client knowledge and competence, transaction reporting to competent authorities

1 Aug 2014 CP & DP close

Apr 2014 Plenary vote to adopt MiFID II

Dec 2014 Advice on Delegated Acts

12 Jun 2014 Published in OJ

Q2

Implementation timeline

Q3

Q4

2015

Jun 2015 delayed ‘Final’ RTS

Q2

Estimated dates

Microstructural Issues

Q3

Jun 2016 Transposition into national law of Member States

Dec 2015 ‘Final’ ITS

Q4

2016

Q2

Q3

Jan 2017 Implementation

Q4

2017

Q2

Parliamentary approval

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

8

Overview of key changes

To illustrate the wide ranging scope of MiFID II, we have set out, at a high level, the key impact areas on asset, wealth, platforms and fund managers. Market structure and transparency requirements could lead to fragmentation of liquidity and increased cost

Commodity markets – position limits will apply but the methodology has yet to be worked out

High frequency trading definition proposed by ESMA will have a much wider impact than was originally envisaged

Ban on inducements will require managers to consider their processes and their adherence to the requirements

Market structure

Investor protection

The market structure changes are likely to introduce greater complexity for managers in terms of data points and feeds

Many member states are already intervening around products, but the directive will enhance the focus on this

There is likely to be further debate around the respective responsibilities of the product manufacturer and the distributor

Tightening of execution only regime through narrower definition of non complex products MiFID II

Systems and processes will need to be adjusted for both MiFID II and MAD, including trade and transaction reporting Consolidated tape provisions could deter some investment banks from making quotes, driving liquidity away from the market

Limitations on dark pools may reduce ability to transact large trades without suffering large market impact costs

Disclosure of cost requirements means that vertically integrated firms will need to make more of a separation between costs

Transparency

Reporting requirements are numerous - could cause Duplication with each other and With other Directives e.g. EMIR

Disclosure

Revised best execution provisions will require firms to annually publish their top five trading venues and repapering of client agreements may be needed

The intention of the directive is that the client facing firm must aggregate the cost of the product and provide a £/% amount Firms will need to identify and disclose conflicts of interest in sufficient detail to enable the client to make an informed decision

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

9

Investment advice

Investment advice under MiFID

MIFID investment advice involves the provision of personal recommendations to a customer, either upon the customer’s request or on the firm’s initiative, in respect of one or more transactions relating to MiFID financial instruments. So, for example, if a firm provides recommendations to the public generally this will not normally be a personal recommendation. Our COBS suitability rules only apply where a personal recommendation is made. A personal recommendation is defined in our Handbook glossary and follows the MiFID definition. It comprises three main elements:

 There must be a recommendation that is made to a person in their capacity as an investor or potential investor, or in their capacity as an agent for an investor or personal investor;  The recommendation must be presented as suitable for the person to whom it is made or based on the investor’s circumstances; and  The recommendation must relate to taking certain steps in respect of a particular investment

FCA Finalised Guidance – Retail investment advice: Clarifying the boundaries and exploring the barriers to market development

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

11

Investment advice under MiFID (2)

FCA definition of personal recommendation: “a recommendation that is advice on investments, advice on conversion or transfer of pension benefits, or advice on a home finance transaction and is presented as suitable for the person to whom it is made, or is based on a consideration of the circumstances of that person. A recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public”

MiFID defines investment advice as the provision or personal recommendations to a client, either on request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments (Article 4(1)(4)). The MiFID Implementing Directive further specifies that “a recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public (Article 52, last subparagraph). See also: • CESR Q&A on “Understanding the definition of advice under MiFID” • CESR Technical Advice to the Commission in the context of the MiFID I review 2010 • MiFID II confirms the definition of investment advice outlined in Article 4(1)(4) of MiFID I In its Final Advice to the Commission, ESMA states that it does not consider that issuing a recommendation through a distribution channel to a wide group is necessarily an indication that the recommendation is not a personal recommendation and confirms that advice provided through internet based channels needs further consideration at Level 3. In this context, it recommended that “through distribution channels” be removed from the MiFID II definition of investment advice. MIFID II Article 4(1)(4): “investment advice” means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments. Article 52 of the Implementing Directive states that for the purposes of “investment advice”, a personal recommendation is a recommendation that is made to a person in his capacity as an investor or potential investor, or in his capacity as an agent for an investor or potential investor. That recommendation must be presented as suitable for that person or must be based on a consideration of the circumstances of that person, and must constitute a recommendation to take one fo the following sets of steps: (a) To buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument; (b) To exercise or not to exercise any right conferred by a particular financial instrument to buy, sell, subscribe for, exchange, or redeem a financial instrument. A recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public.” © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

12

Investment advice under MiFID (3)

Increasing attention being paid to what is investment advice and the role of social media….  FCA Finalised Guidance on clarifying the boundaries of retail investment advice (is it just retail?) FG 15/1  FCA Finalised Guidance on Social media and customer communications FC 15/4  IOSCO report on Social Media and Automation of Advice Tools Surveys

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

13

Independence

FCA definition

Independent advice: a personal recommendation to a retail client in relation to a retail investment product where the personal recommendation provided meets the requirements of the rule on independent advice (COBS 6.2A.3R)

COBS 6.2A.3R (1) A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers to that retail client are: (a) Based on a comprehensive and fair analysis of the relevant market; and (b) Unbiased and unrestricted. (2) Paragraph (1) does not apply to group personal pension schemes if a firm discloses information to a client in accordance with the rule on group personal pension schemes (COBS 6.3.21R)

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

15

ESMA definition

An investment firm informing a client that investment advice is provided on an independent basis shall define and implement a selection process to assess and compare a sufficient range of financial instruments available on the market.

That selection process should include all of the following elements: i. ii. iii. iv. v.

A diversified selection of financial instruments by type, issuer or product provider, which is not limited to financial instruments issued or provided by the investment firm itself of by entities having close links or other relevant close legal or economic relationship with the investment firm should be considered; The number and variety of financial instruments considered should be proportionate to the scope of advice services offered by the independent investment adviser The number and variety of financial instruments considered is adequately representative of financial instruments available on the market; The quantity of financial instruments issued by the investment firm itself or by entities closely linked to the investment firm itself is proportionate to the total amount of financial instruments considered; and The criteria for comparing the various financial instruments should include all relevant aspects such as risks, costs and complexity as well as the characteristics of the investment firm’s clients, and should ensure that neither the selection of the instruments that may be recommended nor the recommendations that are made to the client are biased

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

16

Suitability

Suitability under MiFID I

Article 35 of the MiFID Implementing Directive requires: (1) Member States to ensure that investment firms obtain from clients or potential clients such information as necessary for the firm to understand the essential facts about the client and to have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of providing a portfolio management service, satisfies the following criteria: (a) It meets the investment objectives of the client in question; (b) It is such that the client is financially able to bear any related investment risks consistent with his investment objectives; (c) It is such that the client has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio. (2) Where an investment firm provides an investment service to a professional client it shall be entitled to assume that, in relation to the products, transactions and services for which it is so classified, the client has the necessary level of experience and knowledge for the purposes of paragraph 1(c). Where that investment service consists in the provision of investment advice to a professional client covered by Section 1 of Annex II to Directive 2004/39/EC, the investment firm shall be entitled to assume for the purposes of paragraph 1(b) that the client is able financially to bear any related investment risks consistent with the investment objectives of that client. (3) The information regarding the financial situation of the client or potential client shall include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments. (4) The information regarding the investment objectives of the client or potential client shall include, where relevant, information on the length of time for which the client wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment. (5) Where, when providing the investment service of investment advice or portfolio management, an investment firm does not obtain the information required under Article 19(4) of Directive 2004/39/EC, the firm shall not recommend investment services or financial instruments to the client or potential client.

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

18

Requirements under MiFID II (Level 1)

 Requirements to obtain the necessary information regarding the client’s or potential client’s knowledge and experience in the investment field relevant to the specific type of product or service when providing investment advice or portfolio management.

 Requirements include information in relation to that person’s financial situation including his ability to bear losses, and his investment objectives including his risk tolerance so as to enable the firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him and, in particular, are in accordance with his risk tolerance and ability to bear losses.  Requirements that where an investment firm provides investment advice recommending a package of services or products bundled pursuant to Article 24(11), the overall bundled package is suitable.

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

19

Suitability – ESMA Final Report

Responsibility for the suitability assessment lies with the investment firm

Applies to all personal recommendations and decisions whether to trade

Customer explanation

ESMA Guidelines

Must have adequate policies and procedures and ensure appropriate understanding

Reliance on legal framework for legal persons

If nothing suitable – no recommendation

Clients’ best interests

Comprehensible questions

Consistency of client information

Assess equivalent instruments

Requirements for on-going periodic assessments and reporting

Requirements for advice and portfolio management when switching investments

Need for protection

Assess cost and complexity Up to date information

Use of electronic systems

Appropriate use of tools

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Suitability reports

20

Complex/non complex and appropriateness

Complex/non-complex

Article 25(4) MiFID II: Member states shall allow investment firms when providing investment services that only consist of execution or reception and transmission of client orders with or without ancillary services excluding the granting of credits or loans as specified in Section B.1 of Annex I that do not comprise of existing credit limits of loans, current accounts and overdraft facilities of clients, to provide those investment services to their clients without the need to obtain the information or make the determination provided for in paragraph 3 where all of the following conditions are met: (a) The services relate to any of the following financial instruments (i)

Shares admitted to trading on a regulated market or on an equivalent third country market or on a MTF, where those are shares in companies, and excluding shares in non-UCITS collective investment undertakings and shares that embed a derivative;

(ii) Bonds or other forms of securitised debt admitted to trading on a regulated market or on an equivalent third country market or on a MTF; excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; (iii) Money market instruments, excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; (iv) Shares or units in UCITS, excluding structured UCITS as referred to in the second subparagraph of Article 36(1) of Regulation EU No 583/2010; (v) Structured deposits, excluding those that incorporate a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term; (vi) Other non-complex financial instruments for the purpose of this paragraph (b) The service is provided at the initiative of the client or potential client; (c) The client or potential client has been clearly informed that in the provision of that service the investment firm is not required to assess the appropriateness of the financial instrument or service provided or offered and that therefore he does not benefit from the corresponding protection of the relevant conduct of business rules. Such a warning may be provided via a standardised format; (d) The investment firm complies with its obligations under Article 23

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22

Method behind the madness?

Article 38 of the MiFID Implementing Directive sets out that:

A financial instrument which is not specified in the first indent of Article 19(6) of Directive 2004/39/EC shall be considered as non-complex if it satisfies the following criteria: (a) It does not fall within Article 4(1)(18)(c) of, or points (4) to (10) of Section C to Annex I to, Directive 2004/39/EC; (b) There are frequent opportunities to dispose of, redeem, or otherwise realise that instrument at prices that are publicly available to market participants and that are either market prices or prices made available, or validated, by valuation systems independent of the issuer; (c) It does not involve any actual or potential liability for the client that exceeds the cost of acquiring the instrument; (d) Adequately comprehensive information on its characteristic is publicly available and is likely to be readily understood so as to enable the average retail client to make an informed judgement as to whether to enter into a transaction in that instrument. ESMA’s technical advice to the EU Commission recommended that an instrument not included explicitly in Article 25(4)(a) of MiFID II would need to meet two additional criteria to the above in order to be considered non-complex

ESMA’s technical advice on the additional criteria: i.

ii.

It does not incorporate a clause, condition or trigger that could fundamentally alter the nature or risk of the investment or pay out profile. This would include, for example, investments that incorporate a right to convert the instrument into a different investment; and It does not include any explicit or implicit exit charges that have the effect of making the investment illiquid even though technically frequent opportunities to dispose or redeem it would be possible

ESMA also recommended that the EU Commission clarifies that the specific financial instruments that are excluded from the noncomplex financial instruments described in Article 25(4)(a) of MiFID II cannot then be assessed against the criteria for the assessment of other non-complex financial instruments in accordance with Article 25(4)(a)(vi) of MiFID II and they should be considered complex.

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

23

Scope

Retail Investment products Structured UCITS, structured deposits, AIFs, NURS, ITs

UCITS (excluding structured UCITS), shares*

* Subject to certain conditions

X

No credit or loans

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24

Inducements

Inducements

Evidence

Use of dealing commission

Clients best interests

Designed to enhance the quality of the service

Inducements Ban on retention of commission for IFAs and portfolio managers

Minor nonmonetary benefits

Disclosure

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26

Costs and charges

Costs and charges

 Enhancements to costs and charges disclosure to consumers. Key elements include:  Pre and post sale disclosure;  £ and p requirement;  Aggregation – end distributor;  Third party payments;  Format and timing, including calculation methodologies;  Cumulative effect of costs and charges (back to the future with RIY?);  Comprehensible form;  Extension to professional clients – alignment of retail requirements.

Scope?

Direct impact

Indirect impact

MiFID firm

UCITS/AIFs

 Transaction costs?  PRIIPs KIID?

Don’t assume that non-MIFID firm = no impact

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28

Product Governance

Product Governance – TCF, RPPD +

   

Product reviews Ongoing target market compatibility Action required for where noncompatibility is identified Identification of crucial events

   

1 Governance and Control

7 7

Management body control Role of compliance Clients best interests Maintain and operate effective organisational and administrative arrangements

1

On-going Assessment

2

Product design  





Provision of adequate information to distributors Taking reasonable steps to ensure financial instruments are distributed to the identified target market Distributors to obtain sufficient information to understand the target market Final distributor responsibility 6

Good Customer Outcomes

Sales/ Distribution

     

Identification of target market Conflicts of interest Market integrity Knowledge and experience Scenario analysis Written agreements - collaboration



Establish and review effective policies and arrangements



Product approval requirements, including target market and distribution strategy

3

6

Product Approval

Customer Pricing and Value    

5 Fair, clear and not misleading information Suitability and appropriateness Complex/non-complex delineation Client information/reporting

3 4  

5

2

 

Product costs and charges compatibility with target market Charges do not undermine return expectations Transparency Unbundling 4

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30

Role of the management body

Role of the management body

 Read across of relevant articles from CRD IV to MIFID II plus add ons  ESMA publication of draft guidelines for the assessment of knowledge and competence  What is ‘group think’ and how is independence of mind demonstrated?  Key challenges for firms organised under group governance structures  NED challenges – number of roles and time served  Diversity issues – does your HR policy stand up to this?  Does this mark the introduction of the Senior Managers Regime for Investment Management?  Proportionality – how does it apply in practice?  Do I need to establish a Nomination Committee? If so, what does it do and who should be on it?

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32

Embedding the requirements in existing core business governance and control arrangements



■ ■



SMF must submit Statement of Responsibilities when applying, or when holder’s role materially changes



Training and performance appraisal to embed regime requirements



Conduct regime aligned to conduct and culture programmes

SMFs identified at Board and ExCo level

Risk Capability & Culture

Clear apportionment of responsibilities a SMF holder will be accountable for, aggregate of which must form a complete Firm Map of Responsibilities Responsibilities must align to firm governance framework

Risk embedded , Tone from top cascaded

Universally understood, clearly assessed



Governance models crossing jurisdictions and business functions must be overlaid with individual accountability



Certification and Conduct Framework



Evidence clear accountabilities across the firm



Management information is appropriate to underpin refreshed responsibilities



Reporting is adequate to support enhanced evidentiary expectations



Data is available to meet new requirements for reporting to the regulators

Clarity of roles for individuals, functions, entities

SMR



SMFs are expected to have clear policies and procedures underpinning their requirement to take reasonable steps to ensure: •

business is controlled effectively



complies with regulatory standards



discharge delegated responsibility effectively



disclose expected information to the regulator

Coherent, consistent, linked top to bottom

Simplified, single source, decision support, ensure Breaches compliance recorded, reported and monitored

Risk Management Processes & Control ■

Breaches by SMF holders, certified staff and conduct rules employees notified to regulator



Appropriate disciplinary measures

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Compliance

The role of Compliance

The extended role of Compliance should not be underestimated – how does your Compliance Function stack up against MiFID II?

CF10…..

Controls Assurance

Regulatory reporting

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Gold plating?

National discretion – a single market?

 No marketing passport under MiFID II (services)  Product passports for UCITS and AIFs  Distribution will be subject to national requirements and is therefore fragmented

Key

Examples of jurisdictions with RDR style requirements or bans on payments of commission for portfolio management

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© 2015 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

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