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