pwc mifid ii breakfast · pwc october 2014 mifid ii – what has changed? section 1 pwc mifid ii...

PwC MiFID II Breakfast

A new regime and game changer

www.pwc.lu/mifid

Regulatory Advisory Services

October 2014

1 MiFID II – What has changed? 1

2 How will MiFID II impact distribution? 7

3 How will MiFID II impact manufacturers and markets? 11

4 Conclusions 14

Contents

PwC

October 2014

MiFID II – What has changed? Section 1

PwC MiFID II Breakfast • A new regime and game changer

1

PwC

October 2014

What were the key objectives of MiFID I?

Improve investor protection

Strengthen competition on the financial markets

Enhance market transparency

Client classification

Pre-trade/Post-trade transparency

Transaction reporting

Client Organisation and Governance Markets

Suitability and appropriateness

Information and reporting to clients

Inducements

Client order handling rules Safekeeping of assets

Conflicts of interests

Best execution

Section 1 – MiFID II – What has changed?


2

Measures

PwC

October 2014

Why MiFID II?

Insufficient investor protection

Lack of market transparency

Key shortcomings of MiFID I

No taking into account of new technological and other developments

Obstacles to competition in clearing infrastructures



3

1

2

3

4

PwC

October 2014

What is the MiFID II timeline?



4

2014

Q2 Q4 Q3

2015

Q1 Q2 Q4 Q3

2016

Q1 Q2 Q4 Q3

LE

VE

L 1

L

EV

EL

2

LE

VE

L 3

Transposition period (national level)

Entry into force: 2 July 2014

Transition period

ESMA regulatory technical standards

ESMA implementing technical standards Q2 2016*

2017

Q1

*Possibility of an extension ** Not all guidelines are expected to be ready by January 2016. ESMA will supplement its guidelines with Q&A’s.

Compliance Deadline:

January 2017

National transposition Q3 2016

ESMA guidelines

Delegated Acts (Implementing Measures) Q1 2016*

Q1 2016*

Q1 2016**

PwC

October 2014

What are the main MiFID II changes?



5

Producers/Distributors Transactions/Clearing

Independent/dependent advice (e.g. ban of inducements)

Enhanced periodic information obligations to clients

Enhanced suitability and appropriateness

Recordings of orders (and intention to order) by telephone and electronic communication

Intended target market for new products

Transparency of individual prices in case of pooling of products or services

Investor protection for structured products as well

1

2

4

5

6

7

8

Higher information standards for eligible counterparties

Ban on marketing and distribution of certain products

Higher sanctions in case of misconduct

Higher criteria for qualified senior management

Regulation on third countries

Yearly reporting Top 5 trading venues

9

10

11

12

13

14

Transparency requirements MTF, OTF, Systematic internaliser (SI)

Data storage

More regulation on algorithmic trading

Position limits for commodity derivatives

Trading derivatives through official platforms

Emission certificates become financial instruments

Post-trade-transparency for OTC transactions

15

16

17

18

19

20

21

PwC

October 2014

MiFID II is impacting operating models along the key elements of the production and distribution value chain



6

In House AM/IB

3rd Party AM/IB

Information Inducements

Proprietary Distributors

3rd party Distributors

Product Development Product Placement

Product Approval Process

Service Model

1 2 3

Cli

en

ts S

eg

me

nt

Service Level

Service level

Product range

Distribution set-up

Independent Advice

Portfolio Mgt

Execution only

Dependent Advice

Product Needs

PwC

October 2014

How will MiFID II impact distribution?

Section 2


7

PwC

October 2014

Service levels undergo ‘independence’ and ‘complexity’ change

Section 2 – How will MiFID II impact distribution?


8

Service Model

Retail

Mass - Affluent

HNWI

UHNWI / Family Office

Advice PM Execution only

Non-Complex Complex Independent Not Independent

• Inducement ban: For independent advice and portfolio management services the inducement ban will very likely to cause a shift in what services are offered to which segment

• Non-independent advice: Inducements are only permitted in future in the context of for non independent advice (and execution only), hence impacts of reversing on an open architecture offering and branding will need to evaluated

• Non-complex: Structured UCITS (ESMA definition) added to complex instruments, which will hamper the placement of such funds on execution only basis

PwC

October 2014

Distribution requires advisory fees and transparency



9

Information disclosure

Inducements

Product range

Suitability / Appropriate- ness

Advice Portfolio Management

Non Independent

Independent

Ban or Repayment

Balance of Product Range

• Client profiling – criteria added • Complex financial instruments – execution only restrictions • Suitability review – Monitoring of products vs. clients

• Type of advice & target market • Cost of advice & cost of products • Execution & target market review

Art. 24 & 25 MiFID II

Product Placement

Conditional

PwC

October 2014

Transparency on cost of advice and cost of product



10

Total cost (% & amount; itemised upon request)

Cost of advice

One-off (e.g. deposit

fee)

On-going (e.g. mgt fee

Transactions (e.g.

brokerage)

Ancillary (e.g. research)

Cost of product

One-off (e.g. front

loads, structuring)

On-going (e.g. mgt fee)

Transactions (e.g. mark

ups, brokerage)

Service level

Services Execution

venues

PwC

October 2014

How will MiFID II impact manufacturers and markets?

Section 3


11

PwC

October 2014

Product development process to follow MiFID II governance

Section 3 – How will MiFID II impact manufacturers and markets?


12

Product Development

Review • Actual Investors • Knowledge/Experience & Investment Objective/Horizon • General or limited/dedicated distribution

Transparency • Retail vs. Professional Investors • Knowledge/Experience & Investment Objective/Horizon • General or limited/dedicated distribution

Distribution Strategy • Definition of distribution strategy in line with target market • Information transfer to distributors • Actions for different distribution scenarios and actual outcome

Target Market • Retail vs. Professional Investors • Knowledge/Experience & Investment Objective/Horizon • General or limited/dedicated distribution

3

4

5

6

Product Design/Testing • Statistical Analysis/Backtesting • Use of outcome (best interest to investor), e.g. redesign, product freeze

Or

ga

nis

ati

on

of

Pr

od

uc

t G

ov

er

na

nc

e

1

Art. 16(3) & 24 MiFID II (considering ESMA Opinion 2014/332)

2

PwC

October 2014

Evolution of market structure and trading venues will be key to MiFID II implementation

Section 3 – How will MiFID II impact manufacturers and markets?


13

Regulated Market (RM) • Multilateral system • Market operator • All financial instruments • Non-discretionary execution • Change the status of instruments e.g. listing • Not allowed to execute client orders against proprietary

capital or matched principal trading

Organised Trading Facility (OTF) • Bonds, structured finance, emissions or derivatives • Multilateral system • Discretion on placing, retracting and matching orders

when in compliance with best execution and client instructions

• Pre-trade transparency and best execution obligations • Cannot execute client orders against the proprietary

capital of any entity that is part of the same corporate group of legal person

• Can undertake matched principal trading where client consents and instruments are not subject to the EMIR clearing obligation

• Cannot connect orders or quotes with an SI or operate within the same legal entity as an SI

Multilateral Trading Facility (MTF) • Multilateral system • Investment firm or market operator • All financial instruments • Non-discretionary execution • Not allowed to execute client orders against proprietary

capital or matched principal trading

Systematic Internaliser (SI) • Equities, equity like instruments including depository

receipts and ETFs and non-equity instruments • Operated by an investment firm • Single dealer, not multilateral system • Executes client orders on own account outside of RM,

MTF or OTF • Crosses thresholds for frequent and systematic and on

substantial basis • Can execute against proprietary capital • Cannot bring together multiple third party buyers and

sellers • Firm quote requirements covering non-equity and

equity like instruments traded on a trading venue and with a liquid market

PwC

October 2014

Conclusions Section 4


14

PwC

October 2014

Conclusions – What are the key take-aways?

Section 4 – Conclusions


15

Business Strategy

Client Segmentation/Service Offering: Assessment of segmentation and offering

Product Shelf: Assessment of existing product shelf – i.e. target market and distribution strategy

Fee Model: Assessment of existing fee model for independent advice and portfolio management

Distribution Strategy: Assessment of distribution channels/partners and fee models

Product Governance Processes: Assessment and redesign/enhancement of existing product governance processes

Data Management: Assessment and redesign/enhancement of existing data uploads (initial & updates)

Suitability/Appropriateness Tests: Assessment and redesign/enhancement (incl. cross check with product manufacturer product data and periodic reassessment) of existing suitability / appropriateness processes and systems

Inducement Identification/Monitoring: Assessment and redesign/enhancement of existing compliance programs and controls

Operations & IT

Clients: Review/amend general terms and conditions and other legal documents

Product Manufacturers: Review/amend contractual arrangements

Distributors: Review/amend contractual documents

Communication, Marketing & Branding: Change management on market positioning

Legal & Compliance

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.

© 2014 PricewaterhouseCoopers, Société Coopérative. All rights reserved. In this document, “PwC”

refers to PricewaterhouseCoopers, Société Coopérative which is a member firm of

PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Olivier Carré PwC Luxembourg, MiFID II Leader

400, Route d‘Esch L-1471 Luxembourg

Telephone: +352 49 48 48 4174 E-Mail: [email protected]

Join us on www.pwc.lu/mifid or www.mifid2.lu

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