Speaker. Sandrine Leclercq Director Advisory & Consulting Deloitte Luxemburg E: T:

Transcription

1 Industry Regulatory Update November 2017

2 Speaker Sandrine Leclercq Director Advisory & Consulting Deloitte Luxemburg E: T: Deloitte Touche Tohmatsu Limited 2

3 Agenda 01 Introduction 02 Brexit impact for IM 03 Recent ESMA opinion on delegation & substance 04 EU draft regulation on ESA powers Deloitte Touche Tohmatsu Limited 3

4 Regulatory hot topics to keep under the radar JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC AML IV: complete implementation into national law CRS: First reporting, based on 2016 fiscal year CRS: Deadline for remediation of all pre-existing individuals and entities accounts FATCA section 871 (m) : Phased-in application of obligations BENCH: Application from 1st January 2018 SFTR : Deadline to comply with periodical reporting for AIFM and UCITS EMIR : Variable margin to be exchanged between all counterparties SFTR : Compliance with precontractual documents rules EMIR : Initial margin to be exchanged between category 2 counterparties EMIR : Phased-in implementation of clearing obligations depending on category of derivative SFTR : Transaction reporting for investment firms, credit institution, CCPs, CSD, other financial counterparties and non-financial counterparties MIFID II : Deadline for local transposition MIFID II / MIFIR / PRIIPs : Application date postponed to January 2018 MMF: Application from 21st July 2018 GDPR: Application from 25th May 2018 AML IV: Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing GDPR: Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data (General Data Protection) BENCH: Regulation (EU) 2016/1011 on indices used as benchmarks in financial MiFID II / MiFIR: Directive (EU) 2014/65 on markets in financial instruments instruments and financial contracts or to measure the performance of and Regulation (EU) 600/2014 investment funds MMF: Regulation (EU) 2017/1131 on money market funds CRS: Common Reporting Standards; OECD 2014 PRIIPs: Regulation (EU) 1286/2014 on Packaged Retail and Insurance-Based EMIR: Regulation (EU) 648/2012 on OTC derivatives, central counterparties Investment Products and trade repositories (European Market Infrastructure) SFTR: Regulation (EU) 2015/2365 on transparency of securities financing Deloitte Touche Tohmatsu Limited FATCA: Foreign Account Tax Compliance Act; US federal law 2010 transactions 4

5 Brexit Deloitte Touche Tohmatsu Limited 5

6 Overview of Impacts The issue of passporting and equivalence- Financial Regulations Passporting in the EU Principle: firms authorised in one member state can carry out their activities in any other EU/ EEA country. Products authorized in one member state can be distributed in any other EU/EEA country. Firms can passport in two ways: - establishing a branch/agent; and - free provision of services Financial Directives & Regulations that underpin UK access to the EU Single Market Undertakings for Collective Investment in Transferable Securities (UCITS) Alternative Investment Fund Managers Directive (AIFMD) Markets in Financial Instruments Directive/Regulations (MiFID/MiFIR) European Market Infrastructure Regulations (EMIR) Capital Requirements Directive/Regulation (CRD/CRR) Solvency II Directive Insurance Mediation Directive (IMD) Payment Services Directive (PSD) Second Electronic Money Directive Market Abuse (MAD/MAR) Consequences of firms losing the right to passport in the EU? UK firms may need to: - Build a presence in the EU/EEA in order to continue carrying out activities across the EU - Obtain authorisation from competent local authorities. - Comply with both UK and host country regulation. EU firms may need to be authorised by UK authorities in order to access the UK market. Cross-border groups may need to restructure. Could the right to sell cross border be potentially maintained for UK firms? EEA membership. Single market access in bilateral agreements. Equivalence if the UK becomes a third country : - May enable UK firms to continue offering certain services and products into EU Member States based on the passport - Not currently available for all products and activities Deloitte Touche Tohmatsu Limited 6

7 Overview of Impacts Other impacted areas Non-Industry and Tax Non-Industry Regulation Current Added value Data Protection Development of rules on control over personal data and data protection, simplification of rules for companies in the Digital Single Market AML/KYC Expanded scope of persons and activities subject to the AMLD IV, enhanced transparency with regard to beneficial owners Development and reshaping of risk based approach EU Company Law (mergers & divisions, cross-border business operations, EU legal Entity) EU Labour Law (Employment, Social affairs & Inclusion) Bankruptcy Law Benefiting from general rules on setting up limited liability companies, capital and disclosure requirements, framework for setting up single member company Harmonization of minimum standards for living and working conditions and informing and consulting workers about their situation Impact on each type of contracts governed by the UK law including ISDA, GMRA, GMSLA, etc. Impact on the UK court proceedings No material rule harmonized within the EU VAT Common set of rules (including territoriality) Harmonized VAT rates and scope of application Double Tax Treaties No withholding tax on dividend payments, no taxation on dividends received No withholding tax on interest and royalties Tax free cross border mergers Exchange of information (and rulings) including Common reporting Standards and Country-by-country reporting Anti-Tax Avoidance Directive Capital Duty & Customs Duty The Capital Duties Directive prevents member states from imposing tax on the raising of capital by companies, such as share issues. No custom duties within the EU Treaty on the Functioning of the European Union Tax impacts of the freedom to provide services and of establishment Prohibition of certain State aids (including fiscal State aids) Deloitte Touche Tohmatsu Limited 7

8 Brexit & Market Access Options for impacted actors? Impact Options for impacted actors UK Funds UK Management Companies (ManCo) UK Portfolio Managers/Advisers UK fund no longer benefits from EU marketing passport UK fund may no longer be served directly by EU Management Company UK ManCo may no longer manage / and market directly EU UCITS or EU AIF UK ManCo may no longer be able to operate under a EU branch UK Managers no longer able to manage or advise individual clients on a cross border basis - except reverse solicitation- UK Managers no longer able to operate under a EU branch Create a EU mirror fund / merge with existing EU fund / redomicile fund / transform UK fund into a feeder of EU master fund / co-management set ups Appoint a EU ManCo / or acquire a EU Manco & act as delegated portfolio manager Transfer Business and resources to another group EU ManCo Re-domicile ManCo Transform EU branch into a subsidiary Organize dedicated sales forces out from the EU Consolidate existing ManCo activities with Mifid activities in the EU Acquire a MiFID entity Transform branch into subsidiary UK Distributors EU Management Companies / EU Funds UK Distributor may no longer be the regional center for cross border distribution of funds in the EU UK Distributor may no longer operate through EU branches ManCo and Distributor may no longer operate through permanent establishment in the UK EU funds may no longer be passported in the UK Transfer the business to another EU group entity (Mifid firm or ManCo) Transform branches into local subsidiaries Create new entity in the EU or partner with an existing Acquire EU business Reallocate operations in another UK based group entity / partner with local fund operators / acquire Seek authorisation for the product in the UK / relocate or replicate fund in the UK for UK investors / UK feeder fund of EU master Deloitte Touche Tohmatsu Limited 8

9 ESMA supervision Deloitte Touche Tohmatsu Limited 9

10 ESMA Opinion to support supervisory convergence in the area of investment management Not legally binding but On 13 July 2017, the European Securities and Markets Authority (ESMA) has published an Opinion setting out sector-specific principles in the area of investment management, aimed at fostering consistency in authorization, supervision and enforcement related to the relocation of entities, activities and functions from the United Kingdom. The intention of the Opinion is to ensure that the choice of a new location in the Brexit context is directed by actual business needs and to provide further clarification when it comes to prerogatives of home Member State NCA which shall retain the grip and control of critical operations of the relocating entities. This should be achieved through compliance with general principles set out in the Opinion which could be divided into 3 topics of highest concern: authorization requirements, governance and delegation arrangements. This presentation summarizes mentioned crucial points of the ESMA Opinion which Deloitte considers most relevant to the IM industry, their possible impact on NCAs practice going forward and the amount of additional compliance effort that it may require from actors established in Luxembourg. The Opinion, although more particularly directed at Asset Managers considering to relocate in the EU following to Brexit, is likely to have impacts on all actors established in the EU. As a result of this ESMA Opinion, NCAs may decide to reinforce existing requirements or create new obligations. Note that this document is for information sharing purposes only and does not amount to an advice or anticipation of CSSF possible developing practice as a result of the Opinion Deloitte Touche Tohmatsu Limited 10

11 The main areas of impact are fourfold more precise documentation and justification Substance ESMA proposes to align UCITS substance requirements to AIFM concept i.e. portfolio and risk management ESMA provides with minimum substance in the Manco (3 FTEa) as well as some key criterias to apply to ensure substance is in line with size, nature, scale and complexity of the business ESMA re-inforces the paramount role of local authorized management ensuring the ultimate decision-making is local Delegation There must be documented objective reasons for delegation of any type of activity (incl. function such as IT, Legal, Finance, etc.): (i) detailed descriptions, (ii) explanations and (iii) evidence of the objective reasons provided Delegation to non-eu entities (directly or via chain of delegation) could make oversight and supervision of the delegated functions more difficult Delegation process and oversight are to be well documented and objectively reviewed (initial due diligence via RFP, ongoing due diligence with a focus on on-site visits) Authorized entities should demonstrate to NCAs that they dedicate sufficient human and technical resources to initial and on-going due diligence process i.e it is unlikely that a single person has sufficient knowledge, experience and time to monitor a broader range of complex functions Governance ESMA outlines that sound governance and internal control mechanisms require clarity as to the allocation of responsibilities, documented policies and procedures, structures ESMA insists NCAs to assess and put additional scrutiny on individuals with high numbers of (executive or non-executive) directorships ESMA highlights the importance of the senior management of the entity being available locally Internal control function ESMA is highlighting that compliance, internal audit and risk management function must take active part to strategic decisions. ESMA is putting emphasis on the necessity for the internal control functions, to ensure compliance does actually happen, including through escalation process to the regulator in last instance. Internal control functions must carry out desk-based and onsite controls on an ongoing basis and are involved in the client acceptance and fund set-up processes (often organized in internal committees). These substantial activities usually necessitate a local presence Deloitte Touche Tohmatsu Limited 11

12 EU Commission Draft Regulation on new organization and powers of European Supervisory Authorities ESAs will have pivotal role in certain sectors Shift of supervisory powers from NCA to ESMA According to the proposal, ESMA would become the direct and exclusive supervisor over certain sectors across the EU. The new tasks would concern: Approval and supervision of certain Prospectuses governed by the EU Prospectus Regulation; Approval and supervision of certain EU labelled investment funds (European Venture Capital Funds, European Social Entrepreneurship Funds and European Long-Term Investment Funds); Authorization and supervision of EU's critical benchmarks as well as endorse non-eu benchmarks for use in the EU; and Coordinating market abuse investigations, notably through direct intervention or coordination of cross-border investigations. Second level review of cross border delegation arrangements with third countries While initial notification and authorization remain with the home country NCA, the latter will then have to notify semiannually the ESAs (ESMA and EBA) of all outsourcing setups approved by them during the period and ESMA will review these set ups. New activities for ESAs in sustainable finance and FinTech In a forward-looking perspective, ESAs will also be tasked with promoting sustainable finance. ESAs should account for environmental, social, governance-related factors, and risks. Priority should be given to monitoring and supporting FinTech and cybersecurity developments. Next steps and approval process Now that the proposal is out, the regulatory process will kick in. The EU Parliament and EU Council (MS) will have to define their preferred version of the proposal. In this process, subject to the usual uncertainties about the attitude of EU Council and the EU Parliament, the systemic and political implications will for sure overwhelmed any debate. Based on experience, the regulatory process should be finalized before somewhere in 1Q19 with application probably at the end of the year Deloitte Touche Tohmatsu Limited 12

13 General Data Protection Regulation (GDPR) Deloitte Touche Tohmatsu Limited 13

14 Information Security and Risk Management Control Framework Impacts on the operating model GPDR will mainly impact four layers of the operating model Governance, organization & people Support from leadership Definition of roles and responsibilities Governance, organization & People Processes Data Identification of communication channels Definition and implementation of policies and procedures Training awareness, etc. Processes Review the business processes using personal data (current and future) Identification of the processes with risks Embodying Privacy by Design / by Default in the business processes Include the data subjects rights in the processes design, etc. Data Identification of the personal data collected and processed Implementation of data management, etc. Technology Identification of the systems supporting data processing D O C U M E N T A T I O N Assessing the risks and the related mitigation measures Technology Ensuring that the functionalities are Privacy Friendly and will allow to implement Privacy by Design / by Default, etc Deloitte Touche Tohmatsu Limited 14

15 Impacts on the operating model Examples of how GDPR will impact organizations Governance, organization & people The right of data subjects to information which is specific and quite extensive will need adaptations to the terms and conditions. The accountability of data controllers means having the right kind of subcontracting in place. Transfers of personal data outside of the EU need further guarantees Processes Extended rights, specifically the consent will force e review of websites in order to ensure that consent is collected correctly for cookies. Backup procedures need to be reviewed. DPIAs must be conducted for processing linked to MAR, Mifid, Fatca, for employees and clients to validate their proportionality and necessity. Data The need to better manage data retention will need a better understanding of where data is stored. The discovery of a data breach will need procedures to notify the local DPA within 72h. Technology Retention and the need to delete data for which no legitimate purpose exists anymore will need technical modifications. Digitalization like remotely entering into a relationship with a customer will need documented data protection by design approaches Deloitte Touche Tohmatsu Limited 15

16 MiFID Deloitte Touche Tohmatsu Limited 16

17 MIFID II MIFIR heading to the start line 3 sets of challenges 1 Market changes, new rules, more data Dealing with increased complexity How will brokers, intermediaries position themselves, role of platforms (funds, trading venues ), interactions with other regulation (EMIR and trading obligation) 2 Client interactions (still hot topic inducements, target market, communication) Position firm as independent or not Communicate with clients adequately on fees/retrocession Information challenge: more info, more data, more signature Structuration of offering: mixed products/services, one service one contract 3 Reporting and data Identify all data Access, manage and recover data Protect data Deloitte Touche Tohmatsu Limited 17

18 Managing project through different Work-packages Client Stream Market Stream Governance Stream 14 MiFID II Themes Inducements & Independent advice Enhancement of service quality Product governance Suitability & appropriateness Client information on costs & charges Client agreement & reporting Client information on products & services Transaction reporting Best execution & Investment Research Listing trading - market Pre and post trade transparency Record keeping & recording of telephone Safeguarding of client assets Governance of MiFID firms and organization Deloitte Touche Tohmatsu Limited 6 MiFID high impact areas Inducements Product governance Suitability & appropriateness Client information & reporting Transaction reporting Trading & Best execution Governance & Organization Advisory model (independent vs non independent vs. hybrid) Quality enhancement for non-independent advisory Product complexity Product approval and target market definition/monitoring (manufacturer & distributor) Client profiling & classification, including new investor protection rules applicable Suitability and appropriateness Advisory minutes Client agreement/contracts Information to clients (ex-ante, pre-contractual) Marketing documentation Reporting to clients Transaction reporting covering 36 MiFID Work-packages Investment research Trading obligation Product availability, impact on trading OTF for non-equities SI status applicability Algo & HF trading Best execution and selection & order handling policy Pre- & Post- trade Transparency (equity-like and non-equities) Commodity derivatives markets (limits and reporting) Client assets safekeeping & Intra-group deposits Record keeping Telephone recording Employee remuneration policy Business continuity Whistleblowing policy Business outsourcing policy Employee competence / training Conflicts of interests policy Complaints handling policy Compliance policy Management body organisation (e.g. nomination policy, roles & responsibilities) Personal transaction policy Tied agents 18

19 MiFID Latest challenges ESMA publications of Q&A Availability of software providers Lack of data to determine SI status Uncertainties about market (MIFIR) statistics once UK is out, heading for a review? New topic: training and qualification Application of MIFID to non-mifid entities (i.e. Manco, asset managers, research providers ) Consolidation of data (for reporting) MIFID then what, the trilogy Completion of regulatory phase Emergence of digital Dealing with Brexit Deloitte Touche Tohmatsu Limited 19

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