MiFID II: preparation is key
October 2016
2
The Hopper
MiFID II
Third Countries
Trade Transparency
Derivative Trading
Information to Clients
Telephone Recording
Appropriateness
Remuneration
Fair, Clear and not Misleading
Conflicts
Product Governance
Record Keeping
Advice
Client Assets
Complaints
Compliance
Inducements
Underwriting and Placing
Product InterventionTransaction
Reporting
Suitability
Eligible Counterparties
Client AgreementsBest
Execution
ReportingAlgo and
HF Trading
Art 3 Exemption
3
MiFID II – The timeline
FCA
PSD
ue 2
017
2014
2015
2016
2017
you are
here
Legi
slat
ion
MiFID II 3/1/18
Leve
l 1 e
ntry
into
forc
e2
Jul 2
014
Leve
l 2 A
dvic
e to
EC
19 S
ep 2
014
RTS
to E
C28
Sep
201
5
ITS
to E
C3
Jan
2016
Leve
l 2 A
dopt
ed b
y EC
Nat
iona
l Tra
nspo
sitio
n D
ue 3
Ju
l 201
7
FCA
DP
26 M
ar 2
015
FCA
1st C
P15
Dec
201
5
Leve
l 2 M
easu
res
Fina
lised
H2
2016
FCA
2nd
CP
29 J
uly
2016
FCA
3rd
CP
29 S
ep 2
016
FCA
4th
CP
Due
late
201
6
4
What are we waiting for?
· Technical Standardso Only ITS 19 is in the Official Journal
http://ec.europa.eu/finance/securities/docs/isd/mifid/its-rts-overview-table_en.pdf
StatusPublication in the OJ on hold until Corrigendum is finalised
RTS 3RTS 4RTS 5RTS 8RTS 9
RTS 10RTS 12RTS 13RTS 14RTS 15
RTS 16RTS 17RTS 18RTS 24RTS 25
RTS 26RTS 27RTS 28
Awaiting end of EP/Council Scrutiny period
RTS 1RTS 2RTS 6RTS 7
RTS 11RTS 22RTS 23RTS (C(2016)4417)
RTS (C(2016)3917)RTS (C(2016)4415)RTS (C(2016)4407)
Awaiting adoption by Commission
RTS 20RTS 21ITS 1ITS 2
ITS 3ITS 4ITS 5ITS 6
ITS 7ITS 8ITS AuthorisationITS Passporting
ITS ControllersRTS Controllers
5
Planning ahead
But it’s not finalised?“Firms will need to start planning for the changes ahead of the finalisation of the EU implementing legislation and the subsequent changes we make to our Handbook and the Treasury makes to financial services legislation”
Brexit statement“Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect …”
6
UK implementation
7
Product Governance: Manufacturers
Identify target market
Undertake scenario analyses
Check for conflicts of
interest
Create compliance
report
Deliver to managemen
t
8
Product Governance: Distributors
Identify target market
Obtain manufacturer information
Provide manufacturer with data on sales and reviews
Create compliance
report
Deliver to management
9
Investment Research: What’s changing?
MiFID I• Firms cannot receive
any goods and services in return for client dealing commissions
• Execution related and research related goods and services are exempt
MiFID II• Research received from
third parties is not regarded as an inducement IF certain conditions are met
• Account for third party research as a fixed predictable cost
• Ensure clients’ monies are spent wisely
COBS 2.3B and 2.3CCOBS 11.6
10
Commission Sharing Agreement (CSA)
COBS 2.3B and 2.3CCOBS 11.6
Buy-side (Discretionary
Investment Manager)
Sell-side (Broker)
Buy £1m BT shares (transaction cost = 15bp of which 7bp execution, 8bps research)
£1m BT sharesTotal cost of £1,001,500
7bp execution cost = £700
(Broker receives)
8bp research cost = £800CSA pot (£800)
CSA pot split - Pay portion to themselves, away to other brokers and/or independent research providers
11
Investment Research: How can you comply?
· Option 1 – Pay for research out of your firm’s own pocket – Charge to firm
· Option 2 – Pay for research through a Research Payment Account (RPA) – Charge to client
Specific research
charge to the client Regularly
assess the research budget
Assess the quality of research
purchased Ex ante and ex post
disclosures
Provide clients with a
research policy
12
Telephone Recording
• Recording requirements since March 2009• Retained for at least 6 months• Exemptions for certain firms (e.g.
discretionary investment managers)
• MANDATORY for all firms to record all relevant communications
• Even where a transaction was not concluded• Retained for at least 5 years
NOW
MiFID II
Aggregating costs & charges: summary
· Upfront total of all one-off and ongoing costs paid by client: £ and
%
· Firm’s services/products and any recommended/marketed to
client
· Includes transaction costs not found in KIDs
· Estimates - assumptions regularly reviewed
· Itemised breakdown on request
· Backward-looking annual aggregation based on actual costs
· Illustrate impact on investment return: upfront and annually
What costs/charges must be aggregated?
Some considerations from the example
In good time before start of service….
Which firm aggregates which costs?
Two different cost aggregates and impact illustrations
Packaged investment management and advice service
Anticipated additions to funds under advice
Include client’s other account(s) in aggregation
Impact of portfolio activity
Client scenarios for estimating transaction costs
Benefit or confusion for clients?
16
Article 3 - the Optional Exemption
Article 3 firms must now be subject to ‘at least analogous’ requirements including a fairly comprehensive range of:
Authorisation requirements
Conduct of business
requirements
Organisational requirements
17
Article 3 - the Optional Exemption
· Recording of telephone conversations and electronic communications
· Product governance· Form As· Client categorisation· Disclosure· Suitability· Independence· Best Execution
18
Third-country firms
19
Third Country Access – Retail
Client Type Implications
Retail Clients and
Elective Professionals
Member state requires MiFID branch to be set up• Be home country authorised• Authorised by host regulator• ‘Sufficient’ initial capital.• Senior Manager requirements• Comply with lots of MiFID and
MiFIR• Investor compensation
scheme
• Home country AML compliant.• Cooperation agreements
between the Member State and non-EU country for tax and supervision
• No passport for retail clients• Can get passport for Per Se
Professionals and ECPsMember state decides to apply national law instead• Requirements will vary MS to
MS• No passport at all
20
Third Country Access – Professional
Client Type Implications
Per Se Professional Clients and
ECPs
No need for branch• Third country deemed
equivalent• Home country authorised• No Member State regulation• ESMA Registered• No need to comply with
MiFID
• Home country AML compliant.
• Easy access pan-EU, subject to cooperation agreements (tax supervision) with MSs
• No access to retail and elective professional clients
21
Line by line
• What rules apply to my business?
• Have they changed from MIFID I?
• If so, do I need to take action?
22
Next Steps - Don’t wait
· There is a lot of content in MiFID II· Don’t wait for FCA rules or even the final EU legislation
• Read• Ascertain gaps• Develop solutions • Identify opportunities
Analysis and
Planning
• Change• Test• Train• Client contact
Implement
Your
Pr
ojec
t