Central Bank of Ireland Responses to the Review of the Markets in Financial Instruments Directive

Transcription

1 Central Bank of Ireland Responses to the Review of the Markets in Financial Instruments Directive Questions Posed and CBI Responses Responding CBI Division SECTION 3: PRE- AND POST-TRADE TRANSPARENCY 3.2. EQUITY-LIKE INSTRUMENTS Q33: What is your opinion about extending transparency requirements to depositary receipts, exchange traded funds and certificates issued by companies? Are there any further products (e.g. UCITS) which could be considered? Please explain the reasons for your views. We have no objection to the proposed extension of transparency requirements to exchange traded funds and we are aware this is something that industry would like. However we would say that transparency requirements should apply to UCITS established as ETFs but not to all UCITS. FIFA SECTION 6: TRANSACTION REPORTING 6.1. SCOPE Q67: What is your opinion on the extension of the transaction reporting regime to transactions in all financial instruments that are admitted to trading or traded on the above platforms and systems? Please explain the reasons for your views. We agree with the suggestion to extend the scope of transaction reporting to all transactions in financial instruments that are admitted to trading or traded on a MTF or an organised trading facility. Some platforms may have securities that are unique to them so trades should be captured. MSD Q68: What is your opinion on the extension of the transaction reporting regime to transactions in all financial instruments the value of which correlates with the value of financial instruments that are admitted to trading or traded on the above platforms and systems? Please explain 1

2 Questions Posed and CBI Responses the reasons for your views. Please see our response to question 69, where our opinion and reasoning is broadly similar. Please note that the Central Bank of Ireland already requires the reporting of Derivatives transactions in financial instruments, the value of which correlates with the value of financial instruments that are admitted to trading or traded on a Regulated Market or MTF operated by a market operator. Responding CBI Division MSD Q69: What is your opinion on the extension of the transaction reporting regime to transactions in depositary receipts that are related to financial instruments that are admitted to trading or traded on the above platforms and systems? Please explain the reasons for your views. Our response to both 68 and 69 is yes. A gap in our collective ability to efficiently monitor our markets is where ordinary shares, admitted to trading on a RM, also have a corresponding Depositary Receipt (DR), trading outside of the EEA. MSD Some of these DRs are US instruments (ADRS) and have a US ISIN and are largely dealt in the US. However, a buyer of a DR would generally have the same rights of ownership as the buyer of Ord share. DRs can be converted to Ord and vice versa. Performing an investigation in relation to an instrument without including DR trades might mean only seeing part of the picture. Furthermore it would be very easy for an insider to buy DRs, convert to Ord and sell Ord, thus possibly avoiding detection. (as the DR transaction is not reported). There are other instruments that have similar characteristics to Depositary Receipts and these too should be considered (e.g. Depositary Interests). Q72: What is your opinion of an obligation for regulated markets, MTFs and other alternative trading venues to report the transactions of non-authorised members or participants under MiFID? Please explain the reasons for your views. A member of a local exchange who is not authorised could account for a high percentage of local market volume and therefore could contribute significantly to the price formation process. If that business is not transaction reported, then our view of the market s activity is incomplete. We therefore MSD 2

3 Questions Posed and CBI Responses support the proposal. Responding CBI Division Q73: What is your opinion on the introduction of an obligation to store order data? Please explain the reasons for your views. It makes sense to be able to view order data in order to properly supervise the market in a regulatory capacity. (i.e. for Market Abuse). Put another way, we do not believe that oversight of markets should be impeded by (a) failure to store data or (b) a lack of storage capacity. MSD Q74: What is your opinion on requiring greater harmonisation of the storage of order data? Please explain the reasons for your views. This would be desirable but not essential given that most order book investigations would be internal to a market s local order books. Were the EC to take this proposal forward, the EC should consider contracting a number of service providers to provide data storage solutions appropriate to the various MiFID firms business models so as to alleviate the cost on individual firms. MSD 6.2. CONTENT OF REPORTING Q75: What is your opinion on the suggested specification of what constitutes a transaction for reporting purposes? Please explain the reasons for your views. This is a very grey area and has been the subject of much debate and uncertainty. We would welcome greater clarity on what constitutes a reportable trade. Moreover, the definition of what is a reportable trade should not lead to double (or multiple) counting of what is in essence a single trade. We are concerned that the proposed definition for a reportable trade may not be sufficiently precise to exclude transactions that are part of the chain of execution linking an (ultimate) selling party to an (ultimate) buying party. MSD Such a definition, should in the first instance specify what is understood by (ultimate) buyer and (ultimate) seller. We would propose that this must be 3

4 based on whether a party takes real market risk exposure (as opposed to settlement risk) to the asset in question. In the case of trades which are warehoused over a period of more than one day by a MiFID firm as part of a large staggered market order, we propose that the MiFID firm is deemed to be an (ultimate) buyer or seller. Q77: What is your opinion on the introduction of an obligation to transmit required details of orders when not subject to a reporting obligation? Please explain the reasons for your views. We are not convinced this is necessary as it should be part of the proposed obligation on the executing MiFID firm to store all order data. MSD Q78: What is your opinion on the introduction of a separate trader ID? Please explain the reasons for your views. We are unsure as to the benefits which a separate trader ID would bring to market regulation. As a result, we think that this information is superfluous to requirements and given the increasing amount of program and system generated trading within defined parameters (e.g. algo trading), we do not think it merits consideration. MSD Moreover, there is the risk that publication of such data could be harmful to the trader involved REPORTING CHANNELS Q80: What is your opinion on the possibility of transaction reporting directly to a reporting mechanism at EU level? Please explain the reasons for your views. We have doubts about the practicalities of this. The primary concern would be the significant capacity requirement. ESMA should consider providing a formal specification. MSD Q81: What is your opinion on clarifying that third parties reporting on behalf of investment firms need to be approved by the supervisor as an Approved Reporting Mechanism (ARM)? Please explain the reasons for your views. We would not support the authorisation of ARMs. Our strong opinion is that 4

5 the legal obligation for Transaction Reporting compliance and should rest solely with the reporting MIFID firm at all times. Authorising the ARM would, in our opinion, dilute our ability to impose discipline and monetary sanctions on the reporting MIFID firm. This is because where there is an ARM arrangement, the ARM owes obligations directly to the regulator. Our strong view is that the regime most likely to allow us to meet the standards of proof required to impose monetary sanctions on reporting MIFID firms is one in which we can say that we disregard any distinction between a reporting MIFID firm and any third party working for it to deliver transaction reports. We treat the staff working for the third party as staff of the reporting MIFID firm for the purpose of determining the reporting MIFID firms success or failure in meeting its reporting obligations. By establishing direct obligations from the ARMs to the regulator, the law would, paradoxically, open up the possibility of not being able to prove to an appropriate standard that it was either the reporting firm or the ARM which was responsible for a complex reporting failure. In reality, establishing ARMs only allows reporting MIFID firms to argue that they relied on the fact that the ARM was authorised rather than checking directly that the process adopted by the ARM was leading to the obligations of the reporting firm being fulfilled. An authorisation regime for ARMs does not, in practice, add at all to our ability to get in high quality transaction reports. MSD Q82: What is your opinion on waiving the MiFID reporting obligation on an investment firm which has already reported an OTC contract to a trade repository or competent authority under EMIR? Please explain the reasons for your views. We oppose this as we believe it would undermine the integrity of the data. MSD Q83: What is your opinion on requiring trade repositories under EMIR to be approved as an ARM under MiFID? Please explain the reasons for your views. See our response to Q81. MSD SECTION 7: INVESTOR PROTECTION AND PROVISION OF INVESTMENT SERVICES OPTIONAL EXEMPTIONS FOR SOME INVESTMENT SERVICE PROVIDERS Q84: What is your opinion about limiting the optional exemptions under Article 3 of MiFID? What is your opinion about obliging Member States to apply to the exempted entities requirements 5

6 analogous to the MiFID conduct of business rules for the provision of investment advice and fit and proper criteria? Please explain the reasons for your views. We support the suggestion to oblige Member States to apply the exempted entities requirements analogous to the MiFID conduct of business rules for the provision of investment advice, in order to ensure investors receive the same level of protection. We believe that all investment instruments including insurance products other than protection policies should be covered by MiFID. Ireland currently applies the exemptions under Article 3 to investment firms. These firms are therefore authorised under the Investment Intermediaries Act 1995 (IIA) and are subject to the Consumer Protection Code APPLICATION OF MIFID TO STRUCTURED PRODUCTS Q85: What is your opinion on extending MiFID to cover the sale of structured deposits by credit institutions? Do you consider that other categories of products could be covered? Please explain the reasons for your views. We agree with extending MiFID to cover the sale of structured products by credit institutions as MiFID already applies to credit institutions and therefore should eliminate duplication and confusion around various types of requirements. A tracker bond is an example of a structured product that should be covered by MiFID. In relation to investment advice, the scope of MiFID is limited to investment instruments which can give rise to problems particularly where a firm also engages in business related to instruments other than investment instruments e.g. direct investment in property. There is potential confusion for consumers regarding a firm s regulatory authorisation status where a firm is dealing with MiFID and non-mifid products. This can give rise to a potential gap in consumer protection, along with a lack of clarity with regard to the protections in place and the applicability of compensation schemes. We recommend that this area should be considered further with a view to ensuring that there is more consistent protection in place for consumers. We acknowledge that there may be challenges to including such products but the consultation provides an opportunity to debate these issues at EU level 6

7 DIRECT SALES BY INVESTMENT FIRMS AND CREDIT INSTITUTIONS Q86: What is your opinion about applying MiFID rules to credit institutions and investment firms when, in the issuance phase, they sell financial instruments they issue, even when advice is not provided? What is your opinion on whether, to this end, the definition of the service of execution of orders would include direct sales of financial instruments by banks and investment firms? Please explain the reasons for your views. In our opinion, we consider that MiFID rules already apply in these situations EXECUTION ONLY SERVICES Q87: What is your opinion of the suggested modifications of certain categories of instruments (notably shares, money market instruments, bonds and securitised debt), in the context of so-called "execution only" services? Please explain the reasons for your views. We support the suggested modification as outlined in Option A as it provides additional clarity as to what constitutes a non-complex instrument and greater transparency for investors. Abolition of execution-only (option B) would be inappropriate as retail clients exist that do not require advice for the purposes of making investment decisions as they have already identified the product in which they wish to invest. Q88: What is your opinion about the exclusion of the provision of "execution-only" services when the ancillary service of granting credits or loans to the client (Annex I, section B (2) of MiFID) is also provided? Please explain the reasons for your views. We would support this exclusion on the basis of the increased risk associated with this type of transaction and for the greater protection of clients. We have seen in the past whereby clients did not understand the gearing element of their investments. Q89: Do you consider that all or some UCITS could be excluded from the list of non-complex financial instruments? In the case of a partial exclusion of certain UCITS, what criteria could be adopted to identify more complex UCITS within the overall population of UCITS? Please 7

8 explain the reasons for your views. We agree that there are some UCITS which should be excluded from the list of non-complex financial instruments. It is difficult to categorise the types of UCITS which should be regarded as complex for the purposes of MiFID. We note that the IMSC within ESMA is currently considering issue related to complex UCITS including a possible categorisation of complex UCITS. The result of this work may assist with this matter. FIFA Q90: Do you consider that, in the light of the intrinsic complexity of investment services, the "execution-only" regime should be abolished? Please explain the reasons for your views. No, we don t believe the execution-only regime should be abolished as it is only applicable when certain conditions are met, in particular when it involves non-complex instruments. We believe the proposal to modify the categories of instruments classed as non-complex would strengthen this provision. However, it should always be made clear to the client that they are being provided with an execution-only service and that no advice will be given and that no other engagement or discussion on the product took place. We are currently undertaking a review of the conduct of business rules set out in our Consumer Protection Code. We have set out the following requirement: EXEMPTION FROM KNOWING THE CONSUMER AND SUITABILITY a) the consumer has specified both the product and the product producer and has otherwise not engaged with the regulated entity in relation to that product; In relation to a) above, before providing the product or service the regulated entity must warn the consumer that the regulated entity does not have the information to determine the suitability of that product for the consumer and must obtain written confirmation from the consumer that such warning has been received INVESTMENT ADVICE Q91: What is your opinion of the suggestion that intermediaries providing investment advice should: 1) inform the client, prior to the provision of the service, about the basis on which advice is provided; 2) in the case of advice based on a fair analysis of the market, consider a sufficiently large number of financial instruments from different providers? Please explain the reasons for your views. 8

9 We agree with point 1 whereby prior to the provision of advice, the firm outlines to the client the basis on which advice is provided as it adds to greater disclosure and transparency for the client. Regarding point 2, we would agree with the concept but a definition of sufficiently large number would be required. Also, depending on the type of instrument involved, there may not always be a large number available in the market. Q92: What is your opinion about obliging intermediaries to provide advice to specify in writing to the client the underlying reasons for the advice provided, including the explanation on how the advice meets the client's profile? Please explain the reasons for your views. We strongly support this proposal ( Reasons Why letter ) as it would improve clients investment decision making and enhance investor protection. This requirement exists in Ireland since As part of the review of our Consumer Protection Code we have enhanced and strengthened the rules regarding Statements of Suitability and are currently proposing: Statement of suitability 17. Before offering, arranging or recommending a product or service, a regulated entity must prepare a written statement setting out: a) the reasons why a product or service offered to a consumer is considered to be suitable to that consumer; or b) the reasons why each of a selection of product options offered to a consumer are considered to be suitable to that consumer; or c) the reasons why a recommended product is considered to be the most suitable product for that consumer. The written statement must include an outline of how the product meets the consumer s needs and objectives, and the following, where relevant: i) how the product is suitable for the consumer taking into account the consumer s specific vulnerabilities; ii) how the risk profile of the product is aligned with the consumer s attitude to risk; iii) how the nature, extent and limitations of any guarantee attached to the product is aligned with the consumer s attitude to risk; and iv) where a non-standard PRSA is recommended, the statement must demonstrate why the non-standard PRSA is more appropriate than a relevant standard PRSA. 18. The written statement must be dated on the day that it is completed and tailored to the particular circumstances of each 9

10 consumer. In the case of personal motor and home insurance, a statement of suitability may be in a standard format. 19. The regulated entity must give a copy of this statement to the consumer before providing a product or service and retain a copy. In the case of non-life insurance policies, a statement of suitability may be issued to the consumer immediately after the product has been provided only in urgent situations. Q93: What is your opinion about obliging intermediaries to inform the clients about any relevant modifications in the situation of the financial instruments pertaining to them? Please explain the reasons for your views. In our opinion there can be significant changes in the lifetime of the policy and we believe that clients need to be promptly informed of any such changes as they arise. Q94: What is your opinion about introducing an obligation for intermediaries providing advice to keep the situation of clients and financial instruments under review in order to confirm the continued suitability of the investments? Do you consider this obligation be limited to longer term investments? Do you consider this could be applied to all situations where advice has been provided or could the intermediary maintain the possibility not to offer this additional service? Please explain the reasons for your views. If the obligation were introduced it should be limited to certain types of investments, e.g. longer termed, pension products. If the product was correctly deemed suitable at the time of sale, then if the client s circumstances change subsequently, it may be more opportune at this stage for the firm to review the continued suitability of the investments. If the intermediary is earning trail commission, we suggest they should be conducting reviews and providing advice where relevant. The intermediary should be offering the client a level of service in line with the amount of remuneration they are receiving based on the product or service provided to that client. 10

11 INFORMING CLIENTS ON COMPLEX PRODUCTS Q95: What is your opinion about obliging intermediaries to provide clients, prior to the transaction, with a risk/gain and valuation profile of the instrument in different market conditions? Please explain the reasons for your views. In the case where such information provides a fair representation of the risk/reward profile of an instrument, we support this proposal as it would improve clients investment decision making and enhance investor protection. In the case where the provision of such information may only represent a partial view of the risk/reward profile of the instrument, we would caution that this approach might be misleading and may actually undermine (a) the credibility of this disclosure and (b) the credibility of the regulatory framework mandating it. GM Q96: What is your opinion about obliging intermediaries also to provide clients with independent quarterly valuations of such complex products? In that case, what criteria should be adopted to ensure the independence and the integrity of the valuations? We support the proposal regarding the provision of independent valuations of complex products. We would query the frequency, as it may be expensive for intermediaries to issue the valuations quarterly and it might be more appropriate to align the requirement with the 6 month timescale used in the case of portfolio management. It is standard practice for fund administrators to gather this information on a monthly basis for hedge funds by contacting contracting investment bank counterparties for month-end valuations. GM Drawing an analogy of credit reference bureaux, an alternative solution would be to create a centralised valuation agency (or agencies) who would collate valuations and make them available on a web portal for clients. Q97: What is your opinion about obliging intermediaries also to provide clients with quarterly reporting on the evolution of the underlying assets of structured finance products? Please explain the reasons for your views. We support this proposal as it enhances the information provided to clients but an appropriate technology solution serving the whole industry should be 11

12 found in order to minimise the cost on firms. Q98: What is your opinion about introducing an obligation to inform clients about any material modification in the situation of the financial instruments held by firms on their behalf? Please explain the reasons for your views We would be in favour of the introduction of such an obligation. We consider that such an obligation would lead to greater transparency between firms and the client. However the definition of material needs to be carefully considered. A balance should be agreed as to the level of movement required to trigger the notification of such information to clients. Q99: What is your opinion about applying the information and reporting requirements concerning complex products and material modifications in the situation of financial instruments also to the relationship with eligible counterparties? Please explain the reasons for your views. We would not consider applying the information and reporting requirements to eligible counterparties as we believe that eligible counterparties are considered a sophisticated type of client and should be in a position to consider these matters for themselves. Q100: What is your opinion of, in the case of products adopting ethical or socially oriented investment criteria, obliging investment firms to inform clients thereof? We would consider this an unnecessary obligation unless requested by the client as it has no bearing financially on the client. It should also have been flagged by the client while discussing their investment objectives. In our opinion the most important aspect is the suitability of the product for the client and we believe other suitability criteria need to be achieved before ethical or socially oriented investment criteria are discussed INDUCEMENTS Q101: What is your opinion of the removal of the possibility to provide a summary disclosure concerning inducements? Please explain the reasons for your views. We would agree with the removal of the possibility to provide a summary 12

13 disclosure regarding inducements. The firm should provide the client with a full and detailed disclosure which can easily be compared between firms. A template for disclosure should be designed in order to harmonise the presentation of inducements to clients. Q102: Do you consider that additional ex-post disclosure of inducements could be required when ex-ante disclosure has been limited to information methods of calculating inducements? Please explain the reasons for your views. Yes, we would consider that additional ex-post disclosure should be required in order to ensure full disclosure and transparency for the client. We believe there may be issues around the timeframe in issuing the ex-post disclosure. We suggest including a specific timeframe which must be complied with. Q103: What is your opinion about banning inducements in the case of portfolio management and in the case of advice provided on an independent basis due to the specific nature of these services? Alternatively, what is your opinion about banning them in the case of all investment services? Please explain the reasons for your views. We would agree with the suggestion of banning third party inducements in the case of portfolio management and for intermediaries providing independent advice to eliminate the element of partiality. Commission payments by their nature lead to potential conflicts. The broker market in Ireland is quite large. As part of the review on our Consumer Protection Code we are currently proposing, where a product producer distributes its products through an intermediary and imposes target levels of business or pays commission based on levels of business introduced, the product producer must be able to demonstrate that these arrangements do not impair the intermediary s duty to act in the best interests of consumers, and do not give rise to a conflict of interest, either between the product producer and the intermediary or between either of them and the consumer. PRODUCT PRODUCER RESPONSIBILITIES 41. Where a product producer distributes its products through an intermediary and imposes target levels of business or pays commission based on levels of business introduced, the product producer must be able to demonstrate that these arrangements: a) do not impair the intermediary s duty to act in the best interests of consumers; and b) do not give rise to a conflict of interest, either between the product producer and the intermediary or between 13

14 either of them and the consumer PROVISION OF SERVICES TO NON-RETAIL CLIENTS AND CLASSIFICATION OF CLIENTS Q104: What is your opinion about retaining the current client classification regime in its general approach involving three categories of clients (eligible counterparties, professional and retail clients)? Please explain the reasons for your views. In our experience, many firms have mostly retail clients and a smaller number of professional clients. Not all firms have eligible counterparties and those that do have only a small number. While we would agree with maintaining the current classification regime, it may be worth considering modifying the professional client and eligible counterparty regime to allow less clients be categorised as professional clients. Please see our views on Q105(c). We have consulted on introducing the concept of vulnerable consumer as part of the review of our Consumer Protection Code (Code) and we suggest that consideration be given by the Commission to incorporating this concept in MiFID to enhance consumer protection. The definition of consumer in the Code covers natural persons, groups of persons, partnerships, small businesses with a turnover of less than 3 million annually and members of a credit union. The requirements of the Code were developed to provide protections to all consumers, regardless of capacity, capability or circumstance. However, having considered the findings during themed inspections (particularly those focussed on the provision of financial products and services to older persons), the recommendations made to us by the National Financial Abuse Working Group established by the HSE to reduce the incidence of financial abuse of older persons, and the findings of complaints investigated by the Financial Services Ombudsman, it has become apparent that some level of differentiation of consumers is necessary in order to identify those consumers that require a greater level of protection. Such differentiation has been incorporated into the Code in the form of a definition of vulnerable consumer, which highlights various vulnerabilities that may affect some consumers. Where a regulated entity identifies vulnerability, such consumers must be provided with a greater level of care and protection when being sold a financial product or service. We have defined a vulnerable consumer as a consumer that is vulnerable because of mental or physical infirmity, age, circumstances or credulity.... The definition goes on to provide an indicative list of circumstances that 14

15 could render a consumer vulnerable. The inclusion of this definition in the Code means that regulated entities will now have to consider whether a consumer has any of the characteristics of a vulnerable consumer when making an assessment of the suitability of a financial product or service for that consumer. When collecting information on the consumer s personal circumstances, financial situation, needs and objectives and attitude to risk, the regulated entity must have regard to any vulnerabilities that emerge from its interaction with the consumer. Accordingly, we would suggest to the Commission that the category of retail client should contain a sub-category to include the concept of vulnerable consumers. Q105: What are your suggestions for modification in the following areas: a) Introduce, for eligible counterparties, the high level principle to act honestly, fairly and professionally and the obligation to be fair, clear and not misleading when informing the client; b) Introduce some limitations in the eligible counterparties regime. Limitations may refer to entities covered (such as non-financial undertakings and/or certain financial institutions) or financial instruments traded (such as asset backed securities and nonstandard OTC derivatives); and/or c) Clarify the list of eligible counterparties and professional clients per se in order to exclude local public authorities/municipalities? Please explain the reasons for your views. (a) We would agree with the proposal to introduce, for eligible counterparties, the high level principle to act honestly, fairly and professionally and the obligation to be fair, clear and not misleading when informing the client. The applicable regulations should clarify that they apply equally to all categories of clients. (b) We would suggest that limiting the eligible counterparty regime could be done by specifying the firms it can be applicable to i.e. certain financial institutions etc. (c) The list of entities that can automatically be categorised as professional should be narrowed and specific definitions should be provided for those entities on the list to avoid misinterpretation or varying interpretations among Member States. We would agree with introducing a similar narrow list in relation to eligible counterparties. Q106: Do you consider that the current presumption covering the professional clients' knowledge and experience, for the purpose of the appropriateness and suitability test, could be retained? Please explain the reasons for your views. 15

16 We would agree that the current presumption covering the professional clients knowledge and experience, could be retained if there are modifications to the professional client regime as set out in Q105 above. If the professional client regime remains the same, it cannot be presumed for all clients that they have the necessary knowledge and experience as can be seen by the consultation paper s own reference to the experience of local public authorities and municipalities. Also, if the provisions remain the same, the client has the option to move to whichever category they feel is most suitable LIABILITY OF FIRMS PROVIDING SERVICES Q107: What is your opinion on introducing a principle of civil liability applicable to investment firms? Please explain the reasons for your views. We would agree with introducing a principle of civil liability applicable to investment firms as this provides an additional level of protection to existing mechanisms for example, a Financial Services Ombudsman and breaches of contract laws. Q108: What is your opinion of the following list of areas to be covered: information and reporting to clients, suitability and appropriateness test, best execution, client order handling? Please explain the reasons for your views. We would agree with the list of areas included in this question. We believe that this list should be as broad as possible and suggest that all the Regulations, or at least all the Conduct of Business Regulations, are included EXECUTION QUALITY AND BEST EXECUTION Q109: What is your opinion about requesting execution venues to publish data on execution quality concerning financial instruments they trade? What kind of information would be useful for firms executing client orders in order to facilitate compliance with best execution obligations? Please explain the reasons for your views. We would agree with requesting execution venues to publish data on execution quality concerning financial instruments they trade as this would help firms in their compliance with the best execution requirements and also 16

17 help Member States monitor compliance. This could be expressed as weighted average traded price versus the relevant market volume weighted average price. Q110: What is your opinion of the requirements concerning the content of execution policies and usability of information given to clients should be strengthened? Please explain the reasons for your views. We would agree with the proposal regarding the strengthening of requirements concerning the content of execution policies and usability of information given to clients. In our experience, execution policies and the information given to clients is usually generic in nature and provide no help to clients in determining whether best execution obligations were met FIT AND PROPER CRITERIA Q113: What is your opinion on possible MiFID modifications leading to the further strengthening of the fit and proper criteria, the role of directors and the role of supervisors? Please explain the reasons for your view. Ireland currently applies fit and proper criteria to all members of the board and other key individuals (e.g. compliance officers). In addition, the Central Bank of Ireland recently issued Corporate Governance Codes for Credit Institutions and for Insurance Firms which are both consistent with the MiFID proposals and introduce additional requirements beyond those suggested in the consultation. The CBI would welcome the expansion of additional governance criteria to investment firms, and believe the MiFID proposals are an ideal, proportionate mechanism in which to do so. More specifically, we agree that a further strengthening of the fit and proper criteria and implementing measures providing clarity on those requirements is a good idea. We suggest that a core minimum standard be put in place, and that a member state discretion should be included in the Directive to allow for the imposition of additional requirements where appropriate in the national interest of that Member State. It is also desirable to provide for the flexibility to broaden the range of persons who must comply with the requirement, where this is considered appropriate in the national interest. The core minimum standard should include, for example, conviction for an antimony laundering offence, and the implementing measure should provide guidance on the application of the requirement. ISPS ENF Regarding the role of the supervisor, We agree that competent authorities should be satisfied, at the moment of authorisation and in the on-going monitoring of the firm that all members of the board are and continue to be 17

18 of sufficiently good repute and sufficiently experienced to ensure the sound and prudent management of the firm and compliance with the applicable standards. This will ensure a common high standard of implementation and enforcement across the member states. There is merit in providing in the Directive for mutual recognition across the member states for a refusal to allow a person to conduct a role in a MIFID firm on grounds of fitness and probity. We also agree that non-executive directors should be subject to the fit and proper requirements being persons who are likely to have significant influence over the governance and strategy of the MIFID firm COMPLIANCE, RISK MANAGEMENT AND INTERNAL AUDIT FUNCTIONS Q114: What is your opinion on possible MiFID modifications leading to the reinforcing of the requirements attached to the compliance, the risk management and the internal audit function? Please explain the reasons for your view. The reinforcement of requirements related to the compliance, risk management and internal audit functions of MiFID firms, and in particular compelling all three functions to report directly to a firm s board, would introduce a heightened awareness of these functions in the short-to-medium term, and should ultimately deliver more risk-aware, compliant firms in the long term. ISPS That said, an element of proportionality should be considered in conjunction with the Consultation s proposals. An internal audit function s cost to a small investment firm, for instance, may far outweigh the benefit provided to the firm or the supervisor. On the other hand, it may be prudent to mandate that certain investment firms undertaking certain investment activities have an internal audit function (e.g. dealing on own account) reporting directly to their board. The CBI would support the Commission suggestion regarding the compliance function becoming more involved in the customer complaints procedure - both through the processing of the complaints and reporting to the board on these complaints. Our belief is the proposal would draw the compliance function into a central and customer-considerate role within the organisation, heightening board awareness of how the firm conducts its business with clients. 18

19 ORGANISATIONAL REQUIREMENTS FOR THE LAUNCH OF PRODUCTS, OPERATIONS AND SERVICES Q115: Do you consider that organisational requirements in the implementing directive could be further detailed in order to specifically cover and address the launch of new products, operations and services? Please explain the reasons for your views. Yes, we agree that organisational requirements should be further detailed in order to cover and address the launch of new products, operations and services, therefore enhancing client protection. The launch of new products, operations and services is included as part of the review of our Consumer Protection Code. We are proposing that product producers should have a responsibility to consider the types of consumers their product would - and would not - be suitable for. We are proposing new requirements for product producers to identify a target market of consumers when designing investment products. The target market must comprise the types of consumer for which the product is likely to be suitable (or not suitable). When determining the target market, the product producer should take account of the nature of the product and its general risk profile. We believe that product producers should have stronger obligations regarding the information they provide to intermediaries about their product s design and risk features. We are proposing that product producers must provide distributors of their products with information that is clear, accurate, up to date and not misleading. This product information must be sufficient to enable those who sell the product to understand it so as to be able to determine whether it is suitable for a consumer. We believe that it is important for product producers to periodically review the performance of their products to assess whether a product has performed in accordance with its design and to establish whether the product disclosure and the target market for the product is still correct. We are proposing new requirements to ensure that product producers undertake a post-launch review of the performance of their products. Within the first year of launching an investment product, and annually thereafter, a product producer must check whether the product is continuing to meet the general needs of the target market for which it was designed. PRODUCT PRODUCER RESPONSIBILITIES 43. When designing a new investment product, a product producer must identify the target market for the product, the nature and extent of the risks inherent in the product and the level, nature, extent and limitations of any guarantee attaching to the product and the name of the guarantor. The target market must only comprise the types of consumer for which the product is likely to be suitable. The product producer must also identify the target market for which the product is not suitable. 44. A product producer must ensure that the information it 19

20 provides to an intermediary about its investment products is clear, accurate, up to date and not misleading, and includes the information outlined in Chapter 4, Provision 32 (see below). This product information must be sufficient to enable those who sell the product to understand it so as to be able to determine whether it is suitable for a consumer. 45. Within the first year of launching an investment product, and annually thereafter, a product producer must check whether the product is continuing to meet the general needs of the target market for which it was designed. Where the product producer establishes that a product no longer meets the general needs of the target market, the product producer must: a) reassess the product to identify the consumer type for which it is suitable; b) immediately update the information it provides under Provision 44 above; and c) notify the Central Bank. CHAPTER 4, PROVISION 32 Before offering, arranging or recommending an investment product the regulated entity must provide the consumer, where relevant, with information about: capital security; the risk that some or all of the investment may be lost; leverage and its effects; any limitations on the sale or disposal of the product; restrictions on access to funds invested; restrictions on the redemption of the product; the impact, including the cost, of exiting the product early; the minimum recommended investment period; the risk that the estimated or anticipated return will not be achieved; and the potential effects of volatility in price, fluctuation in interest rates, and/or movements in exchange rates on the value of the investment SPECIFIC ORGANISATIONAL REQUIREMENTS FOR THE PROVISION OF THE SERVICE OF PORTFOLIO MANAGEMENT Q117: Do you consider that specific organisational requirements could address the provision of the service of portfolio management? Please explain the reasons for your views. The CBI would support the proposal to introduce a requirement to retain documents concerning the definition and implementation of investment strategies to discretionary portfolios. Although this may introduce a burden on firms to document decision making, it would also facilitate more in-depth supervisory scrutiny. ISPS 20

21 The enhanced proposals would be particularly beneficial from a supervisory perspective when firms offer both structured financial products and discretionary investment advice. A risk exists where such firms could potentially use discretionary portfolios to assist with failing structured products under the auspices of full discretion, perhaps to their clients disadvantage CONFLICTS OF INTEREST AND SALES PROCESS Q118: Do you consider that implementing measures are required for a more uniform application of the principles on conflicts of interest? We would agree with the proposal to introduce implementing measures to gain a more uniform application of the principles on conflicts of interest. We believe there is a need for further work to be conducted around the areas of inducements and conflicts of interest. However, some conflict of interest implementing measures are already in place via Article 22 of Commission Directive 2006/73/EC. Further implementing measures specifically addressing the uniform application of the conflicts of interest principles across Member States are welcome, but the supervisory priority to ensure compliance with the current (and future) measures is of equal importance as introducing additional measures. ISPS SEGREGATION OF CLIENT ASSETS Q119: What is your opinion of the prohibition of title transfer collateral arrangements involving retail clients' assets? Please explain the reasons for your views. Q120: What is your opinion about Member States be granted the option to extend the prohibition above to the relationship between investment firms and their non retail clients? Please explain the reasons for your views. Q121: Do you consider that specific requirements could be introduced to protect retail clients in the case of securities financing transaction involving their financial instruments? Please explain the reasons for your views. Q122: Do you consider that information requirements concerning the 21

22 use of client financial instruments could be extended to any category of clients? Q123: What is your opinion about the need to specify due diligence obligations in the choice of entities for the deposit of client funds? The first proposal in Section of the Consultation suggests restricting title transfer collateral arrangements for retail (and possibly other) client assets. The second proposal seeks to restrict the collateral that can be used in stock lending and other such situations, where the temporary transfer of securities occurs. ISPS If the restrictions in the first proposal are taken further to include professional clients and eligible counterparties this could lead to difficulties in respect of providing collateral for some securities transactions. This may have a detrimental effect in terms of liquidity in some markets. The CBI supports specifying the due diligence required with regards to the placement of client funds into deposit accounts or certain money market funds (7.3.6, proposal 4). Standards and practices vary widely throughout industry. SECTION 8: FURTHER CONVERGENCE OF THE REGULATORY FRAMEWORK AND SUPERVISORY PRACTICES TIED AGENTS Q125: What is your opinion of Member States retaining the option not to allow the use of tied agents? Ireland currently allows, but has a very small number of, registered tied agents. The CBI would thus have no objection to the removal of the Member State discretion allowing tied agents and sees the benefit of harmonising the regime across the European Union. ISPS Q126: What is your opinion in relation to the prohibition for tied agents to handle clients' assets? The rationale provided in Section 8.1.1, Paragraph 2, item (b) to prohibit tied agents from handling client money is a little unclear. If tied agents are the full and unconditional responsibility of an investment firm, and that investment firm is authorised to handle client assets, then subject to sufficient monitoring and controls, the tied agent should thus be able to handle client monies. On the other hand, if the investment firm which has ISPS 22

23 full and unconditional responsibility for the tied agent does not hold an authorisation to handle client monies, then the tied agent should not be allowed to handle client monies. Q127: What is your opinion of the suggested clarifications and improvements of the requirements concerning the provision of services in other Member States through tied agents? The Central Bank of Ireland s view is there should be a level playing field between all entities providing the same services. Tied agents of credit institutions providing investment services should be subject to the same regulatory regime as agents of investment firms captured by the MiFID. ISPS We note that under Article 32(2) of the MiFID, tied agents are currently assimilated to the branch, but would support the inclusion of a provision that makes it more explicit that tied agents are to be treated in the same way as a branch office. Q128: Do you consider that the tied agents regime requires any major regulatory modifications? Please explain the reasons for your views. The CBI does not consider that the tied agent regime requires any major regulatory changes with the exception of an explicit MiFID requirement for mandatory publishing of a tied agent s details on the (website) register of the host regulator. There should also be a requirement for mandatory publishing of a passporting investment firm s details on the (website) register of the host regulator. The execution of such is currently covered by supervisory protocol. But our understanding is there is not an explicit MiFID provision requiring the publication of tied agent information. ISPS TELEPHONE AND ELECTRONIC RECORDING Q129: Do you consider that a common regulatory framework for telephone and electronic recording, which should comply with EU data protection legal provisions, could be introduced at EU level? Please explain the reasons for your views. Yes, we agree a common framework for telephone and electronic recording should be introduced in order to enhance client protection, more efficient resolution of complaints and harmonisation of conduct of business rules among Member States. The introduction of such obligations should also assist in the prevention of market abuse such as insider trading and market manipulation. 23