Regulatory update & key business challenges

Transcription

1 3rd MiFID II Breakfast Regulatory update & key business challenges Regulatory Advisory Services

2 Contents 1 Update on Level 2 Regulation 1 2 MiFID II Client Survey 3 3 MiFID II recordkeeping & disclosure challenges 8 4 Business Challenge 1 Client interaction 11 5 Business Challenge 2 Recordkeeping & data 16 6 Business Challenge 3 Reporting & disclosure 21 7 Conclusions C-Suite Blocker 30

3 Section 1 Update on Level 2 Regulation 3rd MiFID II Breakfast Regulatory update & key business challenges 1

4 Section 1 Update on Level 2 Regulation Summary of recent events & Level 2 updates Dec 2014 ESMA Technical Advice on MiFID & MiFIR June 2015 Statement of EU Parliament to EU Commission Sept 2015 Sept 2015 Joint letter of UK, DE, FR to EU Commission Publication of Level 2 RTS for MiFIR? Level 2 Delegated Act of EU Commission 3rd MiFID II Breakfast Regulatory update & key business challenges 2

5 Section 2 MiFID II Client Survey 3rd MiFID II Breakfast Regulatory update & key business challenges 3

6 2 MiFID II Client Survey When will you start with the different project phases? Q Q Q Q Programme mobilisation Impact Assessment Strategic Options Gap Assessment Implementation Source: Luxembourg MiFID II Client Survey 3rd MiFID II Breakfast 4

7 Section 2 MiFID II Client Survey How will you organise and staff your project? Resource Types Size: Between 12 to 25 locally Business Legal IT 8% 10% 28% Setup: Primarily cross-divisional/business or group-wide Project Management Compliance External 16% 10% Combination with other projects: PRIIPS Client Segmentation Pricing Strategy 28% Source: Luxembourg MiFID II Client Survey 3rd MiFID II Breakfast Regulatory update & key business challenges 5

8 Section 2 MiFID II Client Survey Where do you consider the greatest impact? Impact from 1 (no) to 5 (radical) Product Design Service Offering Client Segmentation Distribution Reporting Funding and Liquidity Operations & Control Technology & Data Source: Luxembourg MiFID II Client Survey 3rd MiFID II Breakfast Regulatory update & key business challenges 6

9 Section 2 MiFID II Client Survey Where do you expect the greatest challenge/areas of concern? Impact from 1 (no concern) to 5 (significant concern) Regulatory uncertainty Timely strategic decision making Implementation timeline Technology Changes Stakeholder buy in and support Project resourcing/budget Third party dependencies Source: Luxembourg MiFID II Client Survey 3rd MiFID II Breakfast Regulatory update & key business challenges 7

10 Section 3 MiFID II recordkeeping & disclosure challenges 3rd MiFID II Breakfast Regulatory update & key business challenges 8

11 Section 3 MiFID II recordkeeping & disclosure challenges MiFID II disclosure and recordkeeping mapping ESMA CSSF ARMs Brokers & Counterparties TAF TAF Governance Reporting Client Reporting B2C Retail Clients Client orders MiFID Firm Compliance Report Risk Management Report Internal Audit Report B2B Professionals & Nominees Product Manufacturers Target Market Information Target Market Feedback COI records Client records Inducement records Orders & transactions Complaints records Personal transactions Service/ Transaction information Client Portfolio Reporting Client Transactions Reporting B2C Retail Clients Legend: Data Report Record Position records Product information Service information 3rd MiFID II Breakfast Regulatory update & key business challenges 9

12 Section 3 MiFID II recordkeeping & disclosure challenges MiFID II disclosure and recordkeeping Scrutiny increases data and communication challenges Regulatory disclosures The investment firms are subject to the pre-existing governance reportings (compliance, risk, internal audit) as well as to transaction and execution reporting to National Competent Authorities for legal entity and branch(es) respectively. Internal compliance The internal governance is enhanced requiring registers and records to support the management of potential conflicts of interest, inducement justifications as well as the documentation of the adequacy of representativeness in case of independent advice. Regulatory reporting Compliance, COI, Inducements & complaints Transactions Transactions are subject to best execution and subject to the changes in market infrastructure introduced by MiFIR. Additional disclosure of clients concerned and intermediaries. Client Communication Key Business Challenges Transaction reporting Communication The client interactions are subject to extensive logging and recordkeeping duties. The service level agreed with the client determines the governance duties. Data sources Recordkeeping Data The investment firm will be required to obtain product information, cost and inducement disclosures/certifications as well as best execution confirmations from its suppliers (products), brokers and business partners. Recordkeeping MiFID II has extended the requirements to log client interactions relative to service delivery and orders/transactions, to review suitability and portfolio value and to record internal governance. 3rd MiFID II Breakfast Regulatory update & key business challenges 10

13 Section 4 Business Challenge 1 Client interaction 3rd MiFID II Breakfast Regulatory update & key business challenges 11

14 Section 4 Business Challenge 1 Client interaction Client profiling & service contract Qualification of services determines governance duties Key MiFID II requirements Art. 24 (4),(5), 25 (2) MiFID II Sec & 2.17 ESMA FA Client profiling Obligation to take into account for the suitability test 2 new criteria: 1. the client s risk tolerance when assessing its financial objectives 2. the client s ability to bear losses when assessing its financial situation Obligation to conclude Extension of the obligation to conclude a client agreement: Client Retail clients (new) professional clients Services Client agreement Investment services (new) Investment advice only if a periodic assessment of the suitability is agreed with the client (new) Custody services (if retail client) Content OR Notice Investment advice : Scope of the financial instruments (whether broad or restricted) Periodic assessment of suitability (ex-post) + If Independent advice: Selection process & proportion in-house /third party products ( balanced product shelf ) Organisation Process IT Contract Decision on whether to conduct a periodic reassessment of suitability in case of Invest. Advice Enhance client risk questionnaire and/or suitability test with risk tolerance and ability to bear losses Implementation of new Client profiling procedure Enhancement of new client advisor control processes Implementation of review procedures Implement new client profiling and scoring system (recommended) Inventory (tracking) of client service levels (i.e. with or without suitability review, independent or nonindependent, etc.) Choice of media & update Alignment of contracts with new client profile questionnaire Review (& set-up if newly mandatory) invest. advice contracts Define independent advice contracts (if chosen) 3rd MiFID II Breakfast Regulatory update & key business challenges 12

15 Section 4 Business Challenge 1 Client interaction Client profiling & service contract Qualification of services determines governance duties MiFID Firm Accountable Risk Manufacturer Compliance B2B Broker & CP Management Frequency Storage obligation At least annual suitability review (mandatory for portfolio management & if chosen in case of investment advice), frequency to be increased depending on (1) the risk profile of the client and (2) the type of financial instruments recommended At least annual review of the client profiling Review of the advisory contracts upon any material change in the fin. instruments analysis process and/or in the selection process & product shelf (if independent advice) Client assessment: Record-keeping of (1) client categorisation, (2) client agreements & (3) assessment of suitability & appropriateness Communication with client: Record-keeping of the investment advice to retail clients, i.e. (i) the fact, time and date that investment advice was rendered, (ii) the financial instruments that was recommended and (iii) the suitability/appropriateness report provided to the client Degree of review New Change Adjustment 75% 3rd MiFID II Breakfast Regulatory update & key business challenges 13

16 Section 4 Business Challenge 1 Client interaction Recordings Client interactions are subject to extensive logging Key MiFID II requirements Art. 16 (7) MiFID II Sec. 2.6 ESMA FA Scope of the recordings: - telephone conversations - electronic communications - face-to-face conversations relating to at least/intended to result in transactions concluded on own account and the provision of client order services (i.e. not applicable to advice services) For face-to-face conversations, information must include at least date and location, identity of the attendees, initiator of the meeting and other relevant transaction information Notification of the recordings: - Obligation before the provision of the services (in language of service) Equipment: - Prevent the use of privately-owned equipment which the firm is unable to record/copy Documentation: - Obligation to implement a written recording policy Organisation Process IT Contract Implement policy for phone recordings and CROs meeting records standards Determine client facing staff (workstations) subject to recording obligation Educate/Train client advisors and staff on recordings standards Implement recordings process for direct client advisors and all staff in contact with client orders Implement new meeting minutes template Implement risk-based recordings review process (Compliance) Forbid use of privatelyowned equipment to ensure recordings consistency Implement recordings archiving system Implement disclaimer message (multiple languages) Review and disclose the recording policy Implement general/ transaction-bytransaction disclosure with clients 3rd MiFID II Breakfast Regulatory update & key business challenges 14

17 Section 4 Business Challenge 1 Client interaction Recordings Client interactions are subject to extensive logging MiFID Firm Accountable Risk Manufacturer Compliance B2B Broker & CP Management Frequency Any time a communication/conversation relating to OR at least/intended to result in transactions concluded on own account and the provision of client order services related to the reception, transmission and execution of orders is made (i.e. EVERY INTERACTION) Storage obligation Records of the communications/conversations in : - a durable medium - readily accessible and available for clients on request Retention of the records during 5 years for clients and up to 7 years for authorities (from the date the record is created) AND national archiving/recording rules Degree of review New Change Adjustment 50% 3rd MiFID II Breakfast Regulatory update & key business challenges 15

18 Section 5 Business Challenge 2 Recordkeeping & data 3rd MiFID II Breakfast Regulatory update & key business challenges 16

19 Section 5 Business Challenge 2 Recordkeeping & data Product governance Receipt or definition of target market per product Key MiFID II requirements Art. 16 & 24 MiFID II Sec 2.7 ESMA FA Manufacturers Maintain, operate, review a product approval process for each fin. instrument (and significant adaptation) 2 Make available to any distributor all appropriate information on the financial instruments and the product approval process Agreements with non-mifid firms 1 Product approval process Information to obtain and/or provide Distributors Review financial instruments offered or marketed Provide feedback to Manufacturers DOWNSTREAM: obtain (and transmit) information, understand the characteristics and target market UPSTREAM: provide feedback on types of clients, complaints, client surveys Organisation Process IT Contract Implement new product governance at group level for the manufacturing of products Implement new product governance at group level for the placement of products Set up review process of manufactured products Implement product information reception/dissemination process Enhance target market definition by service context Develop interfaces to ensure a proper communication with distributors and on efficient storage of product data (KIIDs, PRIIPs, term sheets) Develop product information storage facilities Develop access tracking Review all distribution contracts and SLAs with product manufacturers for information sharing Redefine range of products according to the service level and revenues Assess fee and distribution strategy 3rd MiFID II Breakfast Regulatory update & key business challenges 17

20 Section 5 Business Challenge 2 Recordkeeping & data Product governance Receipt or definition of target market per product MiFID Firm Accountable Risk Manufacturer Compliance B2B Broker & CP Management Frequency Review of products manufactured: Prior to any further issue or re-launch of the products If aware of event that could materially affect the potential risks to investors At regular intervals to review if product functions as intended Review of products distributed on regular basis Storage obligation Manufacturers have to store and provide to distributors when needed all the required product data (same applies to intermediaries in case of a chain of distribution) Distributors have to store all relevant products information to comply with enhanced client information duties Degree of review New Change Adjustment 100% 3rd MiFID II Breakfast Regulatory update & key business challenges 18

21 Section 5 Business Challenge 2 Recordkeeping & data Best execution Duty to best execute is extended and subject to disclosure Art. 27 MiFID II Key MiFID II requirements Order execution policy Execution venues Transaction Remuneration Clear explanation, in sufficient detail and in a way that can be easily understood by clients, of how orders will be executed by the firm (or placed in case of best selection ) Summarize and make public for each class of financial instrument: 1. The top five execution venues in terms of trading volumes where they executed client orders in the preceding year 2. Information on the quality of execution obtained Prohibition to receive any remuneration, discount or non monetary benefit for routing client orders to a particular trading venue or execution venue (breach on conflicts of interest and inducements rules) Organisation Process IT Contract Classify eligible counterparties per product type Review eligible counterparty list Enhance broker and execution venues information gathering Review best execution principles and factors Redefine brokerage and routing controls in light of remuneration and cost guidelines Develop data storage of execution venues Develop trade execution reporting (top 5 venues) Develop broker interface for execution details (i.e. exact venues) Define aggregate/block orders identifier Review existing brokerage contracts with execution counterparties Publish new Best Execution Policy incl. counterparty risk in case of execution outside trading venue 3rd MiFID II Breakfast Regulatory update & key business challenges 19

22 Section 5 Business Challenge 2 Recordkeeping & data Best execution Duty to best execute is extended and subject to disclosure MiFID Firm Accountable Risk Manufacturer Compliance B2B Broker & CP Management Frequency The top five execution venues and the Information on the quality of execution obtained must be disclosed to public on an annual basis Review in case of material change Storage obligation Additionally to MiFID I data, to assess the best execution investment firms will have to record and store for all transactions: Price of the financial instruments Costs related to the execution including: execution venue fees clearing and settlement fees any other fee paid to a third party Degree of review New Change Adjustment 40% 3rd MiFID II Breakfast Regulatory update & key business challenges 20

23 Section 6 Business Challenge 3 Reporting & disclosure 3rd MiFID II Breakfast Regulatory update & key business challenges 21

24 Section 6 Business Challenge 3 Reporting & disclosure Products & services Disclosure of total costs and inducements Key MiFID II requirements Costs and charges to be disclosed and aggregated 1. Costs and charges charged by the investment firm or other parties when the client has been directed to them 2. Costs and charges associated with the manufacturing and managing of financial instruments Third party payments (inducements) received are part of the cost of service and shall be identified separately. Art. 24 (4) & (5) MIFID II Sec ESMA FA Full point of sale (ex-ante) disclosure Disclosure of cost of fin. instruments + cost of service if the firm recommends or markets fin. instruments to client or if it is required to provide clients with a KID/KIID Ex-post disclosure If the Firm recommends or markets fin. instruments to client, it is required to provide clients with a KID/KIID, has/had an ongoing client relationship during the year Organisation Process IT Contract Decision on aggregating the ex-post reporting on costs and charges with other reporting and decision on frequency of such reporting Implement ex-ante disclosures on the inducements paid/received, the costs and charges Implement ex-post disclosure of the actual costs and charges incurred (personalized & itemized on request) Identify data sources and data storage regarding (i) inducements, (ii) costs of 3rd party services & all products Implement ex-ante disclosure (estimates) and ex-post reporting Implement data sharing agreements with 3rd party product providers (i.e. transaction cost) Review distribution agreements to ensure to be provided with information on transaction fees/ inducements 3rd MiFID II Breakfast Regulatory update & key business challenges 22

25 Section 6 Business Challenge 3 Reporting & disclosure Products & services Disclosure of total costs and inducements MiFID Firm Accountable Risk Manufacturer Compliance B2B Broker & CP Management Frequency Point of sale disclosure (ex-ante): In good time for the client to consider material information when making the investment decision Post-sale disclosure (ex-post): On a regular basis Possible to provide aggregated together with existing period reporting to the client Storage obligation Investment firms must : record and store all costs and associated charges information relating to both investment and ancillary services, the cost of advice, where relevant, the cost of the financial instrument recommended or marketed to the client, how the client may pay for it, also encompassing any third-party payments. Degree of review New Change Adjustment 75% 3rd MiFID II Breakfast Regulatory update & key business challenges 23

26 Section 6 Business Challenge 3 Reporting & disclosure Client reporting Portfolio loss disclosure and periodic suitability review Key MiFID II requirements Art. 25(2) MiFID II Sec 2.17, 2.20 ESMA FA Suitability Portfolio management Client assets Before each transaction: Statement of suitability to provide to retail clients in case of investment advice Periodic (at least annually): Updated statement to provide to retail clients in case of 1/Portfolio management & 2/Investment advice if the firm has informed the client that it will conduct a periodic assessment of suitability Content: Alignment of the content of reports between all categories of clients Fair and balanced review of the activities undertaken & the portfolio performance Frequency: Quarterly unless evidence that the client has accessed online the portfolio at least once during the quarter + when the overall value of the portfolio or leveraged FI (if retail client) depreciates by 10 % and thereafter multiples of 10% Content : Evaluation of the estimated value of the financial instruments on a best effort basis Frequency: Quarterly and more frequently on request at reasonable commercial cost Organisation Process IT Contract Decision on whether to conduct periodic reassessment of suitability in case of invest. advice Extend the reporting contents from retail to professional and eligible clients Enhance controls on contents and frequency of reporting Review valuation process (incl. fair value) Enhance PM reporting process to track losses & perform actions triggered Implement suitability statements Enhance web-based reporting contents & access tracking Adapt IT system to flag leveraged products & track 10% threshold reporting trigger Define reporting contents and frequency waiver contract for eligible counterparties Define reporting level for contingent liability transactions and holdings statement 3rd MiFID II Breakfast Regulatory update & key business challenges 24

27 Section 6 Business Challenge 3 Reporting & disclosure Deep dive Client reporting Portfolio loss disclosure and periodic suitability review Data Management Reporting & Operations Clients Pricing Fair Value Data Committee Quarterly Portfolio Management Reporting Brokers & Counterparties Instr. Types Liability & Ownership Data Data Quarterly Loss Reporting B2B Professionals & Nominees Legend: Portfolio History Record Quarterly Contingent Liability Reporting (per Instrument) Quarterly Positions/Holdings Reporting B2C Retail Clients Data Report Record 3rd MiFID II Breakfast Regulatory update & key business challenges 25

28 Section 6 Business Challenge 3 Reporting & disclosure Client reporting Portfolio loss disclosure and periodic suitability review MiFID Firm Accountable Risk Manufacturer Compliance B2B Broker & CP Management Frequency Storage obligation At least annual suitability review and up-to-date statement (mandatory for portfolio management & if chosen in case of investment advice), frequency to be increased depending on (1) the risk profile of the client and (2) the type of financial instruments recommended At least quarterly portfolio management and client assets reporting and more frequently: - upon reach of a threshold reporting trigger for portfolio management reporting - upon client request for client assets reporting (at reasonable commercial cost) Suitability statements (indication of how its meets client objectives, characteristics & preferences) Portfolio management reports (incl. activities and performance) and execution reporting Client assets reports (assets subject to MiFID, those affected by peculiarities in ownership status, estimated value of the prices not available) Degree of review New Change Adjustment 80% 3rd MiFID II Breakfast Regulatory update & key business challenges 26

29 Section 6 Business Challenge 3 Reporting & disclosure Transaction reporting Enhanced contents and change in interface (ARMs) Key MiFID II requirements Art. 25 & 26 MIFIR New financial instruments in scope All securities traded on Regulated Market, MTF and OTF incl. index and underlying New data to be gathered and reported 42 new fields to report including client (beneficial owner) related information Organisation Process IT Contract Provide new needed information (i.e. client identification) Implement transaction reporting governing procedures Assess obligation regarding transparency reporting according to each execution counterpart used and instruments traded Implement interfaces and IT systems to exchange with counterparties and ARMs Set-up IT databases to store and report new required information, including client and beneficial owner information Implement SLA and contracts with ARMs Review existing contracts with execution counterparties 3rd MiFID II Breakfast Regulatory update & key business challenges 27

30 Section 6 Business Challenge 3 Reporting & disclosure Transaction reporting Enhanced contents and change in interface (ARMs) MiFID Firm Accountable Risk Manufacturer Compliance B2B Broker & CP Management Frequency Transaction reporting must be performed and sent to Approved Reporting Mechanism or to the National Competent Authority on a daily basis Storage obligation To perform the transaction reporting, investment firm will have to gather and to store new data, including: the details of the deal (buy/sell, quantity, date and time of execution, transaction prices; a designation to identify the clients on whose behalf the IF has executed; a designation to identify the responsible for the investment decision; identification of the investment firms concerned; Degree of review New Change Adjustment 90% 3rd MiFID II Breakfast Regulatory update & key business challenges 28

31 Section 6 Business Challenge 3 Reporting & disclosure Deep dive Transaction reporting Data field mapping and key changes 42 new fields 73% new data Change compared to MiFID I Client identification Decision maker, algorithm and waiver identification IT impact Medium Medium Legal impact High High Buyer/Seller logic High Low Small regulatory adjustments Medium Low Comments Full identification of the client (ID number, name, date of birth). Issue if the reporting entity is outside Luxembourg (i.e. banking secrecy). Full identification of the decision maker if not the client (e.g. discretionary portfolio managers, 3 rd party advisors). The buyer/seller logic is the same as for EMIR (e.g. for interest swap, the buyer will be the fix rate and the seller the floating rate). New fields to reports due to new MiFID II requirements (e.g. matched principal trading). MTF and OTF traded instruments also in-scope 3rd MiFID II Breakfast Regulatory update & key business challenges 29

32 Section 7 Conclusions C-Suite Blocker 3rd MiFID II Breakfast Regulatory update & key business challenges 30

33 Section 7 Conclusions C-Suite Blocker C-Suite Blocker Key decisions and actions CFO - Budgeting for Data management, reporting & interfaces - Fee schedule adjustments coordination - Financial impacts simulation CEO - Definition of service positioning - Definition of fee schedule - Definition of B2B strategy - Identification of competitive advantages CRO - Product Target Market assessment - Contingent liability and leverage positions identification CLO - Revision of Client Service Contracts - Revision/Implementation of Waivers - Agreements with ARMs CCO - Recordings review (risk based) - Inducements and CoI Management - Transaction Reporting disclosures management 3rd MiFID II Breakfast Regulatory update & key business challenges 31

34 Olivier Carré Luxembourg, MiFID II Leader 400, Route d Esch L-1471 Luxembourg Telephone: olivier.carre@lu.pwc.com Join us on or This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, Société Coopérative, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers, Société Coopérative. All rights reserved. In this document, refers to PricewaterhouseCoopers, Société Coopérative which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.