Implementing MiFID II for Retail Business. Tuesday 11 th July 2017 Dentons LLP, One Fleet Place, London EC4M 7RA

Transcription

1 Implementing MiFID II for Retail Business Tuesday 11 th July 2017 Dentons LLP, One Fleet Place, London EC4M 7RA

2 Jeffrey Mushens - Chair Technical Policy Director, TISA

3 Agenda Opening remarks by Jeffrey Mushens, Technical Policy Director, TISA Chair Stephen Hanks, Institutional Business Policy, FCA FCA Policy Update Michael Wainwright, Partner, Dentons LLP Legal Framework for Retail Investments Steve Jenner, Head of Customer Strategy, Janus Henderson Product Governance for manufacturers Coffee Break Poppy Achilles, Programme Manager, Vanguard Roles & Responsibilities of manufacturers and distributors Alex Denny, Director Investment Management, Fidelity Appropriateness Panel Session: Costs & Charges on ex post and ex ante disclosure Closing remarks from Jeffrey Mushens - Chair

4 Costs & Charges the Challenges Ex ante Ex post Timing of reporting Illustrating the cumulative effect of charges What's in scope

5 Costs & Charges the Challenges Strawmen - ex ante Example of universe of charges

6 Stephen Hanks Institutional Business Policy, FCA

7 Michael Wainwright Partner, Dentons LLP

8 Doc v1 MiFID II Legal Framework for Retail Investments 11/07/2017 Michael Wainwright Partner Dentons UKMEA LLP

9 Introduction MiFID II Financial advice market study Redefinition of investment advice Asset management market study Senior management and certification regime 13/07/2017 9

10 Governance MiFID II product governance o Extensive information exchange between product providers and distributors House policies inducements, best execution, conflicts New responsibilities and powers under SMCR Requirement to appoint NEDs o Value for money framework o Personal responsibility under SMCR 13/07/

11 Advice Alignment of UK rules with EU definition of advice o Advice only regulated where it comes with a personal recommendation Greater scope for online services, including complex products Platform industry sustaining financial advisers after RDR o new market study on investment platforms 13/07/

12 Prospects for distribution of retail investments Impact of low interest rates and RDR ban on commission Adviser charges encourage ongoing client relationships Platforms and model portfolio services support financial advisers at additional cost to the investor o Attitude to risk (ATR) models B2C platforms provide support for DIY investing in low cost collectives 13/07/

13 Regulatory Intervention Variation of permissions Competition analysis and powers o Benchmark submissions o State Aid rules on bank bail outs ESMA product intervention powers under MiFID II o Retail CFDs 13/07/

14 Reporting and data Transparency and transaction reporting Telephone recording Disclosure of costs and charges Reporting on performance Notification of 10% depreciation on portfolio 13/07/

15 Derivatives On exchange, clearing and margin requirements o Derivatives less accessible? Regulators threatening action on retail contracts for differences, once new MiFID powers become available Track record of poor outcomes in relation to SME interest rate hedges 13/07/

16 Conclusion Changing landscape for advice on retail investments MiFID II is part of a much larger picture Unbundling under RDR seems to have increased overall costs FCA want to use governance as a tool to squeeze margins 13/07/

17 13/07/ Thank you Dentons UKMEA LLP One Fleet Place London EC4M 7WS United Kingdom Dentons is the world's largest law firm, delivering quality and value to clients around the globe. Dentons is a leader on the Acritas Global Elite Brand Index, a BTI Client Service 30 Award winner and recognized by prominent business and legal publications for its innovations in client service, including founding Nextlaw Labs and the Nextlaw Global Referral Network. Dentons' polycentric approach and world-class talent challenge the status quo to advance client interests in the communities in which we live and work Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices.

18 Steve Jenner Head of Customer Strategy Janus Henderson Investors MiFID II Product Governance for Manufacturers July

19 MiFID II Product Governance for Manufacturers 1. Product Governance structure 2. Product Lifecycle 3. Target Market 4. Industry consensus 5. Practical application

20 Product Governance structure TISA/IA Good Practice Guide on MiFID II Product Governance Defined organisation and operating requirements Formal governance and controls Appropriate senior management oversight Investment and fund boards Other corporate entities Explicit provisions for Compliance oversight Appropriate staff, knowledge and expertise Role profiles Training Manufacturer product governance structure and process to be made available to distributors

21 Product Lifecycle Builds on established good practice for most manufacturers Product design Identifying investor needs customer research Target market and distribution channels Identify risks Stress testing, scenario analysis, crucial events Conflicts of interest Pricing and value Cost and charges compatible with investor needs and product outcomes Formal product approval process

22 Product Lifecycle Builds on established good practice for most manufacturers Customer communication Timely, clear, fair, not misleading Appropriate for audience - customer testing On-going oversight Sales and distribution Target market and distribution channel Product information and training Post launch product assessment Still meeting investor expectations

23 Target Market substantial progress made But 6 months to go and still ground to cover Significant industry collaboration Interpretation and practical application Product manufacturers and distributors Trade bodies Data vendors Regulators ESMA guidance shows a clear consideration of the EFAMA target market framework and feedback Extensive input from the TISA, IA and members EWG draft European MiFID II standard data format EMT

24 Known knowns and known unknowns Regulatory approach and scope still bedding in Responsibilities for non MiFID II manufacturers UCITs and AIFMs FCA most MiFID II regulations apply directly or as guidance for non-mifid II products ESMA - TM oversight as good practice for non-mifid II manufacturers Other national regulator approaches still being confirmed Especially for complexity and appropriateness tests ESMA June guidance seems to revert to all AIFs are complex FCA will continue to apply Article 57 complexity tests Local variation has implications for both cross border distribution and target market data standards (28 fields!) Inter-relationship with target market, PRIPPs and IDD e.g. comprehension alerts and recommended holding periods

25 Target Market EFAMA model Simple, unambiguous, data friendly Cross border collaboration 5 ESMA target market criteria + Distribution channel 1. Client type 2. Knowledge and experience 3. Ability to bear losses 4. Client objectives and needs 5. Risk appetite (6.) Distribution channel Data format responses Yes, Null, No Null" is crucial grey area neither + or -, it depends Can be applied to all products, not just funds

26 Further industry consensus needed The devil remains in the detail to avoid inconsistency Final alignment across target market models and industry groups EFAMA, EWG, WM Daten, banking, structured products and insurance bodies High level consensus needed on asset classes and product types Absolute return Open ended property funds Frontier markets Share classes Complex products Professional/experienced investor only products e.g. QIFs Distributor risk appetite still to be determined Limited to plainest vanilla non-complex mass market products? Treatment of diversified portfolios

27 Final decisions required on practical delivery Industry infrastructure remain a focus for TISA working groups Consensus on delivery approach still to emerge but not crucial Data +/or narrative UCITs KIIDs, PRIIPs KIDs or prospectus Stand-alone target market documents Information for end investors NB: Consistency across all communications will still be required Practical target market oversight still under debate Proportionate approach = complex products only? Build on existing sales data for all products? What does an exception look like? (+ ve or ve) Distributor willingness and ability to provide or just enable How far down the chain can manufacturers realistically go? Infrastructure build and cost third party vendors

28 And the clock is ticking The industry is still digesting ESMA and FCA guidelines But the end of the regulatory engagement process now forces all stakeholders to work (quickly) with what we have January MiFID II Day.

29 Poppy Achilles Programme Manager, Vanguard Asset Management

30 Implementing MiFID II for retail businesses Roles & Responsibilities of manufacturers and distributors

31 Good Practice Guide Product Governance Target Market sub-group Focused information exchange between manufactures and distributors Key area of discussion Sales MI Group made up of manufacturers, intermediate distributors and some end distributors Sales MI recommendations have been developed

32 Areas of debate Manufacturer & Distributor Product Governance obligations Proportionality What information do we need Negative target market reporting Information exchange mechanisms Next steps

33 Manufacturer & Distributor product governance responsibilities MiFID II Delegated Directive require manufacturers and distributors to review products on a regular basis to assess whether the product remains consistent with the needs, characteristics and objectives of the identified target market and whether the intended distribution strategy remains appropriate. Manufacturer Distributor Intermediate distributor 1. Make TM information available to distributors 2. Consider, on a proportionate basis, what information is needed to complete product reviews 1. Define actual target market (can be same as potential) 2. Change distribution strategy - notify manufacturer 3. Negative target market sales notify the manufacturer 4. Must provide manufacturers with information 1. Intermediate distributors need to enable passing of information from manufacturer and distributor (2 way)

34 Proportionality Factors driving proportionality: Regulator comments Complexity of product Distribution strategy Distributor oversight Availability of information FCA A firm must comply with the PROD rules in a way that is proportionate and appropriate. In doing so, the firm must take into account the nature of the instrument or service and the target market. ESMA Manufacturers should consider, on a proportionate basis, what information they need in order to complete their review and how to gather that information.

35 What information do we need Industry consensus is developing Non-complex product - focus on basic sales MI Complex product - focus is on additional MI, client type, distribution channel, results of appropriateness test Complaints information Negative target marketing reporting Manufacturers will rely upon first distributor in the chain for MI e.g. A platform UK Platforms ahead of the game Need to engage our European distributors Working towards reporting to be available Q1 2018

36 Negative target market reporting Challenges End Distributors who plan to sell outside of the TM i.e. broaden distribution strategy how will this work in practice?. End distributors selling into the negative TM have to report to manufacturer no reporting infrastructure exists Manufacturers reliant on intermediate distributors to supply MI - but not all MI is available MI not available for XO/non-advised channel sales cannot report on these sales MI required where diversification used no consensus on how this will work Sub-group working through these questions

37 Exchanging information TISA sub-group formed to look at mechanics of data exchange Information exchange already a reality but no standards exist Challenges: Multiple distributors in a chain causes a look through issue Agreeing a standard firms can work with Negative target market reporting Only 6 months to go Need to engage with European partners

38 Manufacturers - things to consider Be prepared to act on MI MI is not the whole solution, its complimentary Should be part of wider KYD activity Due diligence - onboarding Distribution agreements Due diligence - ongoing Sales MI

39 Distributors - things to consider Product governance is your obligation too Put in place/enhance product governance framework Consider impact on people, process and technology Be aware of your reporting obligations Selling outside of manufacturer target market Selling into the negative target market Product reviews Complaints End IFAs need to be engaged

40 Thank You! TISA Dakota House 25 Falcon Court Preston Farm Business Park STOCKTON-ON-TEES TS18 3TX

41 Alex Denny Director Investment Management, Fidelity

42 MiFID II Appropriateness and Complexity TISA working group approach July 2017 Alex Denny Fidelity International For investment professional use only and not for general public distribution

43 Contents 1) What is a complex product? FCA vs ESMA 2) How can you check appropriateness? 3) Simple, Complex / Non-complex, Not simple The MiFID vs PRIIPs dilemma

44 FCA vs ESMA? 44 MiFID II Appropriateness & Complexity

45 So who is right? Well, in the UK, the FCA are the competent authority ESMA Q&A 6/6/17 Page 67: Can shares in non-ucits collective investment undertakings explicitly excluded under point (i) of Article 25(4)(a) of MiFID II be nevertheless assessed against the criteria set out in Article 57 of the MiFID II Delegated Regulation Answer No Shares in non-ucits explicitly excluded from the universe of non-complex products are complex per se and cannot be reassessed against the criteria set out in Article 57 of the MiFID II Delegated Regulation. FCA Policy Statement 17/14, 3/7/17 Page 89 Updated rules on the appropriateness test 12.5 In CP16/29, we said that, in our view, investment trusts and non-ucits retail schemes (NURS) are neither automatically non-complex nor automatically complex, but must be assessed against the criteria set out in the MiFID II delegated regulation. We also said that when firms apply these criteria, they should adopt a cautious approach if there is any doubt as to whether a financial instrument is non-complex. This remains our view of how t Commission Delegated Regulation (published after final ESMA recommendations) 25/4/16 Page 75 Article 57 A financial instrument which is not explicitly specified in Article 25(4)(a) of Directive 2014/65/EU shall be considered as non-complex for the purposes of Article 25(4)(a)(vi) of Directive 2014/65/EU if it satisfies the following criteria (Art 57 tests) 45 MiFID II Appropriateness & Complexity

46 What is a complex product? And what is it not? UCITS are non complex but what about everything else? Article 25(4)a sets out non-complex instruments Shares (not in collectives), Bonds, Money market, UCITS, most structured deposits and Other non-complex instruments Article 57 sets out criteria (A-F) by which other non-complex instruments can be judged: A. Not a derivative B. Frequent opportunities to redeem / withdraw at public prices C. No chance of losing more than you invest D. No trigger or clause to alter risk (convertibles) E. No charges that make it effectively illiquid F. Adequately comprehensive information available But aren t all non-ucits complex? We believe not, because otherwise Article 57 is dead-end regulation which can never be applied. 46 MiFID II Appropriateness & Complexity

47 CIS Manager / Pension Manager Other Firms Exempt from MiFID Not performing MiFID business Performing MiFID business Advice / Managing Execution or Reception & Transmission Other MiFID business Perform Suitability test Clearly inform client that no Appropriateness test has been performed (unless there is an embedded derivative in the product) Confirm re ongoing Suitability Listed shares Bonds / Debt UCITS Non- Non- Non- Deriv Deriv Deriv Deriv Deriv Deriv Non- Complex TBC Other Derivatives Potential liability exceeds cost Insufficient public information Little opportunity to redeem No Appropriateness test required Perform Appropriateness test 47 MiFID II Appropriateness & Complexity

48 So what is complex and what is not? Non-complex (examples): Most NURS funds Most ETFs Most investment trusts Complex (examples): Split-cap investment trusts (nature of risk) Convertible loan stock (nature of risk) Subscription shares (derivative / nature of risk) Some property / infrastructure funds (liquidity) 48 MiFID II Appropriateness & Complexity

49 How can you check appropriateness? What exactly are you trying to test? Non Complex / Non Complex Compare with the nearest comparable non-complex instrument. What makes it different? Article 57 A to F does the customer understand what they are buying? 49 MiFID II Appropriateness & Complexity

50 The MiFID PRIIPs dilemma Complex but simple? Not simple, but non-complex? PRIIPs and MiFID cannot be intended to lead to confusion. Simple products are non-complex 50 MiFID II Appropriateness & Complexity

51 ESMA non-paper on PRIIPs: Amendments to the Commission Delegated Regulation of New provisions on comprehension alert In developing the criteria for the inclusion of the comprehension alert in KID, the ESAs should ensure that all of the following factors are fully taken into account: (a) the likelihood of retail investors not understanding the risks incurred by acquiring the PRIIP; (b) the likelihood of retail investors not understanding the PRIIP being offered; (c) the criteria specified in Point 10 of the ESMA Opinion on MiFID practices for firms selling complex products (ESMA Opinion on MiFID practices); (d) the criteria specified in Point 11 of ESMA Opinion on MiFID practices; (e) the International Organization of Securities Commissions' (IOSCO) related work streams. 51 MiFID II Appropriateness & Complexity

52 The TISA guide to implementation Further reading The full TISA Approach to implementation guide on Appropriateness and complexity can be found here: Alternatively search for TISA appropriateness in Google This document is to be updated following recent publications by ESMA and the FCA. 52 MiFID II Appropriateness & Complexity

53 Panel Session Costs & Charges on ex post and ex ante disclosure

54 Thank You! TISA Dakota House 25 Falcon Court Preston Farm Business Park STOCKTON-ON-TEES TS18 3TX