MiFID II / MiFIR seminar Break-out session 1: Retail conduct investor protection

Transcription

1 MiFID II / MiFIR seminar Break-out session 1: Retail conduct investor protection Peter Snowdon, Partner Charlotte Henry, Senior Associate Norton Rose Fulbright LLP 15 October 2014

2 Retail conduct investor protection examined

3 Retail Conduct Overview of Changes Overview of changes Timing Significant number of micro changes being made to the existing investor protection regime Small number of new macro changes being introduced to the existing investor protection regime Together they SNOWBALL into significant regulatory reform in the way firms conduct their business The devil is in the detail! ESMA s proposals in their current form will significantly alter the agreed Level 1 landscape Level 1: Finalised and adopted Into force 3 Jan 2017 Level 2: Consultation period closed ESMA final response expected Jan 2015 FCA consultation expected Jan

4 Introducing the Traffic Light guide

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9 Conflicts of Interest

10 Conflicts of Interest - Level 1 Conflicts of Interest No significant change to MiFID I Where? Recital 56 and Articles 16(3) and 23 MiFID II What? No substantive changes Level 1 amalgamates what was originally included in Levels 1 and 2 of MiFID I but these are not new requirements Expressly states that conflicts include: receipt of inducements from third parties the firm s own remuneration and other incentive structures With MiFID II now applying to investment firms and credit institutions selling their own securities, enhanced conflicts 10

11 Conflicts of Interest - Level 2 Conflicts of Interest Significant changes proposed: disclosure as a last resort Over-reliance on disclosure implies conflict of interest policy is deficient bespoke (not generic) disclosure warnings to be included in disclosures policies reviewed / updated frequently Hot Topic: placing and underwriting Where? ESMA Consultation Paper, para 2.9 What? Increased limitations on the use of disclosure: explicit commentary that can only be made as a last resort can only be made where a firm s organisational/ administrative measures means that conflicts cannot be prevented with reasonable confidence must consider other conflict management measures New requirements for content of disclosures: not generic: must be specific and tailored New warning in disclosures Increased requirements to review/ update policies frequently (at least annually) New presumption that over-relying on disclosing conflicts/ potential conflicts must be considered to be a deficiency in the firm s conflicts of interest policy 11

12 Conflicts of Interest Impact on firms Conflicts of Interest Depending on a firm s existing practices, either moderate or significant: review existing prevention measures update policies create disclosure documents for different client types/investment strategies consider how to ensure disclosure is used as a last resort /balance against common law disclosure requirements Depends on sector some sectors (e.g. asset managers) already well prepared Reassess conflicts that a firm faces and the steps that are taken to prevent and manage them Audit existing structural and governance arrangements Reassess financial incentive arrangements Reassess in what circumstances disclosure is made to clients and how disclosure is done Create suite of disclosure documents (separate from terms and conditions) and ensure: the disclosure includes the warning the disclosure sets out the steps taken by the firm to mitigate the conflict Maintain records as part of client file and to prove not disclosed in every case Update conflicts of interest policies Ensure compliance monitoring programme requires policies to be updated annually Probably still acceptable to disclose potential as well as actual conflicts Balance with common law requirements - if disclosing conflicts to manage them 12

13 Complaints Handling

14 Complaints Handling - Level 1 Complaints Handling No significant change to MiFID I Where? Articles 16(2) and 75 MiFID II What? No significant changes to MiFID I The same text is used in Level 1 In addition, Member States required to notify ESMA of their outof-court complaints and redress procedures implemented in that jurisdiction ESMA will keep a list on its website 14

15 Complaints Handling - Level 2 Complaints handling Enhancements proposed include: requirements for written complaints handling procedure and specific requirements in relation to firms handling of complaints ESMA potentially producing more guidelines in future currently applies to all clients Where? ESMA Consultation Paper, para 2.4 What? New process mirroring the banking/ securities sector guidelines New requirements to establish/ maintain complaints management policy New governance requirements: complaints management function to investigate complaints reporting of complaints data to NCAs (where applicable) compliance to analyse complaints data to identify/ address issues New processes: complaints to be able to be made free of charge firms to communicate in plain, intelligible language responses to complaints without any unnecessary delay firms to provide final position and explain further options Concerns: ESMA s proposals do not distinguish between client types are professional clients subject to this process? No clarity on what amounts to a complaint - any small dispute? 15

16 Complaints Handling Complaints handling Impact on UK firms; if ESMA applies complaints handling process to retail clients only, little impact for UK firms but if applied to professional clients as well, moderate change. Questionable if workable in practice no clarity on what amounts to a complaint Impact on firms Little impact on UK firms dealing with retail clients as the UK regime already had a detailed approach to complaints handling Significant impact if the regime is extended to professional clients: may need to agree what amounts to a complaint (not every day niggles) unclear whether professional clients will be subject to the same retail client processes or whether a different disputes process can be agreed with them contractually compare to the dispute resolution process implemented under EMIR permitted to contractually agree the process for professional clients; query if FCA does the same under MiFID II It seems that access to the FOS may remain for consumers only as the out-of-court disputes resolution process only needs to be for consumer complaints 16

17 Inducements: firms other than portfolio managers and independent advisers

18 Inducements - Level 1 Inducements: firms other than portfolio managers / independent advisers No significant change to MiFID I Where? Recital 74 and Article 23, 24(1) and 24(9) MiFID II What? No significant change to inducement requirements: existing MiFID I Level 1 and Level 2 provisions brought into the Level 1 text not new requirements No express reference to firms (other than independent advisers or portfolio managers) being able to receive minor non-monetary benefits Most important change is in the context of dealing with eligible counterparties; any disclosures to ECPs (including in relation to inducements) will need to be fair, clear and not misleading 18

19 Inducements - Level 2 Inducements: firms other than portfolio managers / independent advisers Significant tweaks proposed, including: quality enhancement test clarified Further ESMA Recommendations and Guidelines to be developed minor non-monetary benefit excluded as an inducement Hot Topic: treatment of research Where? ESMA Consultation Paper, para 2.15 What? Clarifications to the Quality enhancement test a non-exhaustive list to determine when the test is not met commentary on when it is met ESMA proposes to develop further Guidelines and Recommendations Questionable extension of Level 1 ESMA proposes that all firms are able to receive minor non-monetary benefits Limitations on what amounts to a minor non-monetary benefit an exhaustive list of what is a minor non-monetary benefit strictly interpreted controversial comments on research 19

20 Inducements Inducements: firms other than portfolio managers / independent advisers Significant impact : effectively killing free research COBS 2.3 table to align to ESMA table Impact on firms Reassess inducements received/ paid against quality enhancement test FCA may need to align its non-exhaustive table of reasonable non-monetary benefits (COBS 2.3) with ESMA s exhaustive list of minor non-monetary benefits Firms may need to reassess whether any reasonable non-monetary benefits are still permitted under ESMA s minor non-monetary benefits table (Where applicable) firms may need to revise and amend their terms of business and distribution agreements that include monetary/ non-monetary benefits which have previously been assessed under the existing inducements regime If adopted in its current form, firms will need to revisit how they receive and pay for research. 20

21 Research Level 2 UK regime 21 To qualify as a minor non-monetary benefit: cannot impair clients best interests must be intended for wide distribution cannot amount to a third party allocating a lot of resource to produce for a firm volume/ quality of research cannot be linked to volume of transactions placed by firm through research entity content cannot be tailored distribution cannot be restricted to firm buying other services Firms can pay for research at a reasonable price (i.e. market value) ESMA has received substantial push-back so this may not go ahead COBS 2.3 and COBS 11.6 (use of dealing commission). Prohibition unless: does not impair clients best interests reasonable grounds that reasonably assist in provision of services directly relates to execution of orders amounts to substantive research evidential provisions included ESMA s proposals consistent with the FCA s recent direction of travel: PS 14/7 on Changes to the Use of Dealing Commission Rules into force 2 June 2014 DP 14/3 Discussion on the use of dealing commission regime closed 10 October 2014 supervisory findings comply now! unbundling research from commission? Feedback on DP to coincide with ESMA final position (Jan 2015) Depending on MiFID II outcome, FCA to indicate

22 The FCA believes, in line with the results of our thematic work, that a more effective market for research and more efficient asset management sector will develop if dealing commission is not used to fund these goods and services. Therefore, the FCA has been supportive of ESMA s proposals. Source: FCA MiFID II conference, 18 September 2014, David Lawton, Director of Markets, FCA 22

23 The unbundling of dealing commissions could have a more significant impact than the Retail Distribution Review on asset managers, with smaller groups and fund ranges particularly at risk, analysts have warned. Source: Investmentweek.co.uk, 13 October

24 Inducements: portfolio managers and independent advisers

25 Inducements - Level 1 Inducements : portfolio managers / independent advisers New EU wide ban on payments being received and kept Applies to all client types Minor non-monetary benefits excluded Member States can gold plate Where? Recital and Articles 24(7) and (8) MiFID II What? Significant changes NEW BAN! firms cannot receive and retain payments from third parties applies to all independent advice or portfolio management services (not non-independent advice) relates to advice/ management with retail and professional clients payments must be passed onto clients in full clients must be informed how the transfer mechanisms work firms are unable to set off any payments from fees owed to them payments paid by client or on behalf of client only permitted where the client is aware of the payment and agrees the amount/ frequency New requirement for a policy to ensure commissions are allocated and transferred to clients New exclusion from ban for minor non-monetary benefits (provided comply with clients best interest rule) Ability for Member States to gold-plate 25

26 Inducements - Level 2 Inducements: portfolio managers / independent advisers Proposals include: timing of paying over third party payments and information to clients minor non-monetary benefits proposed to be strictly interpreted an exhaustive list Hot Topic: treatment of research Where? ESMA Consultation Paper, para 2.15 What? Clarification on mechanics of paying over payments: no specific time period from receipt prescribed test is as soon as reasonably possible after receipt transfer to the client money account Requirement that any payments received and passed over be regularly reported to clients Clarification on boundaries of minor non-monetary benefits (see earlier slide) Commentary on research (see earlier slide) 26

27 Inducements Impact on firms Inducements: portfolio managers / independent advisers Significant impact: new ban on UK portfolio managers permitted genuine Non-RDR Payments may not match ESMA s minor non-monetary benefits extending RDR ban to professional clients effectively killing free research Plus: FCA Thematic Review and Discussion Paper on use of dealing commission and unbundling research Mixed impact due to UK having already gold-plated MiFID I with RDR Independent advisory firms minor impact extension to professional clients but advice is not the same for professional clients discrete query on whether RDR facilitation will be impacted will need to extend RDR to structured deposits Restricted advisory firms no impact as UK RDR goes further Portfolio managers impact! UK RDR relates to payments made by discretionary managers, not payments they receive will apply to all clients of portfolio managers, not just retail clients Platform service providers no impact as UK RDR 2 goes further Product providers no impact when distributing within UK as UK RDR goes further but impact when distributing outside the UK As for other types of firms, will need to reassess minor non-monetary benefits and revisit how they receive and pay for research. 27

28 Inducements: Level 2 v UK RDR / RDR 2 Key UK measures are less than MiFID II UK regime will need to change UK measures go substantially beyond MiFID II UK will gold plate UK measures are more or less aligned with MiFID II Independent Advisory Firm Retail clients Professional clients ECPs Restricted (UK) / non-independent (EU) advisory firm Portfolio manager / discretionary investment manager Platform service provider Non-advisory firm (execution only broker) Product manufacturer 28

29 Inducements: Level 2 v UK RDR / RDR 2 MiFID II requirement New UK COBS requirement Commentary Independent advisers prohibited from accepting and retaining remuneration from third parties in relation to provision of the service to clients (Art 24(7)(b)) N/A N/A Portfolio managers prohibited from accepting and retaining remuneration from third parties in relation to provision of the service to clients (Art 4(8)) Minor non-monetary benefits excluded from ban (provided satisfy inducements rules) (Arts. 24(7)(b), 24(8)) Independent advisers prohibited from accepting any remuneration *from third parties in connection with advice to UK retail clients on retail investment products Restricted advisers prohibited from accepting any remuneration* from third parties in connection with advice to UK retail clients on retail investment products Product providers prohibited from paying advisers any remuneration *(other than for Genuine Non-RDR Services) and only permitted to pay platform services in very limited circumstances Portfolio managers currently prohibited from paying referral payments to advisers for clients referred to them. But no prohibition on receiving remuneration* portfolio managers owe fiduciary obligations to their clients in any event. Restrictions on using dealing commission (COBS 11.6) Nothing is excluded. However, firms can receive remuneration* for Genuine Non-RDR Services (i.e. where the service is unrelated to the advice to the UK retail client) UK unlikely to implement MiFID II change as represents a watering down of current requirements. UK will gold-plate MiFID II. Need to extend to professional clients UK unlikely to implement MiFID II change as represents a watering down of current requirements. UK will gold-plate MiFID II. Query how deal with professional clients UK unlikely to implement MiFID II change as represents a watering down of current requirements. UK will gold-plate MiFID II UK likely to implement MiFID II change as widens the regulatory net. Already made comments on this. Query how this will impact on dealing commission rules. Query how deal with professional clients UK unlikely to implement MiFID II change as represents a watering down of their current requirements. Likely to notify EU that they are gold-plating Relates to services in connection with financial instruments which now include structured deposits Disclose how transfer mechanics for passing the remuneration on to clients Firms not allowed to offset any third party payments from the fees due by the client to the firm (Recital 74) ** and (existing MiFID I requirement) excluded from inducements is remuneration paid by the client or a person on behalf of the client (Art 24(9)) ** nothing in the Articles themselves on this point Definition of retail investment products does not currently include structured deposits Advisers: Disclose adviser charging model and other fees and how facilitation works. Portfolio managers: Disclose fees and charges Facilitation of adviser charge from product providers / platform service providers to UK independent and restricted advisers UK likely to amend definition of retail investment product to include structured deposits within scope of regime UK unlikely to implement requirement as not applicable for retail clients. May be implemented for professional clients depending on how they deal with them UK likely to maintain facilitation ability under inducement carve-out provided product providers/platforms act as the agent of the client when facilitating the payment of their fee to the firm and client agrees to facilitation. UK likely to extend facilitation to portfolio managers once introduced new rules 29 * remuneration means fees / commissions / monetary / non-monetary benefits

30 Best execution

31 Best Execution - Level 1 Best execution Significant changes: new transparency requirements imposed firms to take all sufficient steps firms that RTO/ place to have policies policies to be more detailed Where? Recital 97 and Article 27 MiFID II What? Significant new requirements: firms and trading venues to publicise data about executed transactions firms must summarise and publish annually their top five execution venues by trading volume for each class of financial instrument and information on the quality of execution obtained trading venues and systematic internalisers must also annually publish information on quality of execution for certain types of financial instruments Significant strengthening of current requirements: firms to take all sufficient steps to obtain best execution notify clients of material changes to a firm s policy in ongoing relationship demonstrate best execution to national regulators order execution policies to be clear, easily comprehensible and sufficiently detailed 31

32 Best Execution - Level 2 Best execution Significant enhancements proposed including: additional transparency and disclosure requirements customised best execution policies separate summary sheet for retail clients no clarity on test of all sufficient steps Where? What? ESMA Consultation Paper, para 2.21 ESMA Discussion Paper, paras 2.3 and 2.4 Additional obligations on pre and post trade transparency requirements New data requirements on trading and execution venues New order flow and execution quality reporting requirements Additional requirements and clarifications to increase transparency of firm s policies and procedures: customised, as opposed to generic, order execution policies all venues/ entities used for execution to be listed in policies for retail clients, separate sheet summarising the best execution policy additional disclosure obligations in policies Clarity on a material change which triggers a review of the policy Clarity on satisfying best execution when using a single venue or entity No additional clarity on how all sufficient steps compares to all reasonable steps 32

33 Best Execution Impact on firms Best execution Significant impact: additional transparency requirements and data / reporting requirements customised best execution policies separate summary for retail clients additional disclosure, recordkeeping no clarity on test of all sufficient steps Plus: FCA Thematic Review on Best execution (July 2014) Reassess whether the steps a firm takes matches up to all sufficient steps to achieve best execution and how to prove this Tailor order execution policies and list all possible execution venues in policies Create separate summary disclosure documents for retail clients Set up procedures to inform customers of execution venue immediately after execution and review best execution arrangements to ensure business practices are fit for purpose, supported by appropriate second line defence controls Ensure compliance monitoring programme has material change triggers to review policy Plus FCA TR14/13: Best execution and payment for order flow (July 2014) understand which activities covered by best execution obligation reinforce monitoring capability to identify best execution failures/ poor client outcomes be clear on who has responsibility and accountability for best execution additional evidential requirements when firms use own internalisers or connected parties consider any PFOF arrangements 33

34 UK asset management industry may be leaving as much as 4.2bn of client returns on the table by failing to monitor how effectively its brokers are managing trades. Source: FT.com 31/8/14 [MiFID II] will also present an implementation challenge for firms. Firms need to ensure now that they have fully embedded our existing regulatory requirements in preparation for the implementation of MiFID II to ensure they can continue to act in their clients best interests. Source: FCA, TR14/13, p8. 34

35 Recording of calls

36 Recording of calls - Level 1 Recording calls New requirements for certain firms to record certain calls and other electronic communications Record to be kept for 5 / 7 years File note of face-to-face meetings with clients to be kept Where? Article 16 MiFID II What? Significant changes: existing MiFID I Level 3 option to record telephone conversations and electronic communications brought into the Level 1 text now mandatory extends to recording face-to-face conversations with clients Includes conversations/ communications about transactions that were not executed New record-keeping requirements - records to be kept for minimum of 7 years (5 years for client requests; 7 years for requests of national regulators) 36

37 Recording of calls - Level 2 Recording calls Significant extension including: content of records for face-to-face meetings with clients in a durable medium extends to third country branches operational procedures Where? ESMA Consultation Paper, para 2.6 What? New Policy recording of telephone conversations and electronic communications policy and effective procedures to ensure recordings kept technology neutral Governance obligations senior management oversight educate and train employees Record-keeping obligations list of personnel approved to have devices from time record created Face to face conversations: prescribe content of written minutes/ attendance note Storage durable medium allow unaltered/ deleted reproduction of record accessible and readily available 37

38 Recording of calls Recording calls Significant impact: not only calls and e-communications recorded, but face-to-face meetings by a file note keep for 5 7 years (not 6 months) in durable medium Impact on firms Implement policies and procedures (if not already) Extend record-keeping duration to 7 years (currently 6 months in UK) Ensure meetings with clients that relate to executing transactions are recorded Introduce a new template attendance note for meetings Review storage capabilities to ensure will allow unaltered reproduction 7 years later Keep in a durable medium physical tapes? back-up CDs? 38

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