Welcome and Introductions

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1 09 June 2016 Welcome and Introductions Susan Wright, Regulatory & Compliance Specialist, IA Product Governance - Target Market Definition - an Industry Framework 1

2 09 June 2016 Key Note Address David Geale, Director of Policy, Strategy & Competition, FCA Product Governance - Target Market Definition - an Industry Framework 2

3 09 June 2016 The Regulatory Landscape Jonathan Lipkin, Director Public Policy, IA Product Governance - Target Market Definition - an Industry Framework 3

4 09 June 2016 The World of UK Authorised Funds Karen Bowie Senior Adviser Product Regulation Peter Capper Fund and Investment Risk Specialist The World of UK Authorised Funds 4

5 AGENDA UCITS V update Product Governance (excluding Target Market/Distributor liaison) FCA s other proposed changes to Authorised Fund legislation FCA s other discussion topics Liquidity management Securities Financing Transaction Regulation ESMA work on Share Classes Loan Origination The World of UK Authorised Funds 5

6 UCITS V UPDATE UCITS V L2 comes into force on 13 October 2016 FCA CP 16/14 issued May 2016 Retention of UK s Independence requirements Action for all Authorised Fund Managers For example - Decision making process for choosing and appointing the depositary based on pre-defined criteria and meeting the sole interest of the UCITS and its investor. - Justifying to investors, upon request, the choice of depositary Depositary appoints, as a custodian/sub-custodian, a sister company of the manager The World of UK Authorised Funds 6

7 MIFID II PRODUCT GOVERNANCE (EXCL TARGET MARKET & DISTRIBUTOR LIAISON) Application to Authorised Fund Managers? FCA still considering its approach for non MiFID business Current requirement Responsibilities of Product Providers and Distributors for the Fair Treatment of Customers (RPPD) Guidance RPPD vs MiFID II Product Governance provisions IA work in progress Gap Analysis Questionnaire The World of UK Authorised Funds 7

8 FCA S OTHER PROPOSED CHANGES TO AUTHORISED FUND LEGISLATION The introduction of a mandatory template for managers of UCITS to use to notify the FCA of details of their derivatives risk management process (DRMP); Changes to SUP 16 to formalise the reporting by depositaries of all COLL and FUND breaches on the funds they oversee, along with any issues arising as a result of depositaries monitoring of AFM s operations; Requiring prospectuses to include PRNs assigned to each fund and, in the case of an umbrella, each sub-fund; Rules applicable to Charity Authorised Investment Funds; Changes to the criteria a money-market fund must apply when assessing whether assets are high quality to remove references to credit ratings; Changes to COLL relating to investment in government and public securities; Calculation of preliminary charges; Clarification with respect to pension feeder funds and NURS schemes investing in feeder funds; Clarification on the calculation of borrowing limits; and Removal of outdated provisions relating to Stamp Duty Reserve Tax (SDRT), historic pricing, bearer certificates and periodic closure of unit registers. The World of UK Authorised Funds 8

9 FCA S MATTERS FOR DISCUSSION Liquidity management and soft closure Eligible counterparties for derivative transactions Investment in ELTIFs by authorised funds Permitted links in COBS 21 The World of UK Authorised Funds 9

10 LIQUIDITY MANAGEMENT FCA webpage: Liquidity Management: Good Practice (IA circular 64-16) Importance of liquidity management Disclosure of liquidity risks to investors Good practice on liquidity risk management and oversight Good practice on fund dealing Implementation of exceptional liquidity management tools and measures The Investment Association's work on liquidity management tools (IA circular 71-16) The World of UK Authorised Funds 10

11 SECURITIES FINANCING TRANSACTION REGULATION (SFTR) Entered into force on 12 January 2016 Disclosures on use of SFTs and Total Return Swaps required in period reports from 13 January 2017 Disclosures on ability to use SFTs and TRS required in prospectus for existing funds from 13 July 2017 But Disclosures on use of SFTs and TRS required in prospectus immediately for new funds. SFT trade reporting obligations expected to take effect in 2018 FCA consultation CP16/14 on changes to Handbook due to SFTR issued May 2016 The World of UK Authorised Funds 11

12 ESMA WORK ON SHARE CLASSES OF UCITS First ESMA DP issued in December 2014 proposed a definitive list of types of acceptable share classes Second ESMA DP issued in April proposed a principles based approach Some challenges around principle of non-contagion The World of UK Authorised Funds 12

13 AIFMD REVIEW AND LOAN ORIGINATION Requirement for European Commission to start a review of AIFMD by 22 July 2017 after a public consultation Implementation of AIFMD third country passport key outstanding issue ESMA Opinion on Loan Origination in Funds published in April 2016 Suggested European Commission should consider mandatory regime or opt-in European loan origination fund framework Commission expected to consult on common EU approach on loan origination in funds in Q2 as part of CMU The World of UK Authorised Funds 13

14 09 June 2016 The Regulatory Landscape in 2016 and Beyond Costs and Charges Disclosure Mark Sherwin, Senior Adviser, Financial Reporting 9 June 2016 Costs and Charges Disclosure 14

15 CONTENTS 1. What's happening? 2. Who needs it? 3. What have we got? 4. What more do we need? 5. What does IA aim to achieve? 09 June 2016 Costs and Charges Disclosure 15

16 WHAT S HAPPENING? April 2015 IGCs required to obtain and report scheme charges and transaction costs Dec KID to be provided before a client invests in a PRIIP (except UCITS and NURS) LGPS disclosure framework Jan MiFID II disclosure of costs and charges pre-sale and annually Dec KID (instead of KIID) to be provided before a client invests in a UCITS or NURS No regulatory specification of transaction costs New EU transaction cost methodology required to capture market impact Underlying cost information not available when PRIIPs invest in underlying investment products Costs on face of KID not compatible with MiFID II requirements Data provision 09 June 2016 Costs and Charges Disclosure 16

17 WHO NEEDS IT? Workplace DC Pensions DPM clients (MiFID II) PRIIPs Cost data Product distributors (MiFID II) Insurance wrappers (PRIIPs) LGPS 09 June 2016 Costs and Charges Disclosure 17

18 WHAT HAVE WE GOT? Pension Fund Disclosure Code ( PFDC ) first issued in 2002 Revised in 2007 to reflect the execution provisions of MiFID Level one Disclosures address a firm s execution policies and approach to managing transaction costs Level two Client specific disclosure of management fees an analysis of transactions and commissions by counterparty and the application of commission sharing arrangements (CSAs), transaction taxes, direct custody costs, stock lending fees and underwriting commissions CIS Disclosure Code, based closely on the PFDC, was issued in 2008 to reflect FSA s desire for commission disclosures for retail products. Depositary is regarded as the investor representative in this context. Disclosures in accordance with the Code fulfil FCA disclosure expectations for use of dealing commissions (COBS G) 09 June 2016 Costs and Charges Disclosure 18

19 WHAT MORE DO WE NEED? A new generation Disclosure Code Will need to cover a broader range of products through which asset management services are distributed Level one Will need to revise disclosures about execution policies to reflect MiFID II provisions May introduce explanation of pricing policies for pooled investment products Level two Revised Code expected to be issued for consultation in Q Specification of cost data required to support disclosures irrespective of product type Will need to analyse payments for research (RPAs or P&L) in place of CSA analysis Will need to include implicit and indirect costs in addition existing explicit cost disclosures 09 June 2016 Costs and Charges Disclosure 19

20 WHAT DOES IA AIM TO ACHIEVE? Cost and charges disclosure: An industry standard specification of transaction costs, with regulatory backing Potentially an industry standard data provision template A complete data set that can be used to fulfil regulatory requirements for all types of product for all types of client 09 June 2016 Costs and Charges Disclosure 20

21 CONTACT: Mark Sherwin 21

22 09 June 2016 Panel Session (Q&A)... Product Governance - Target Market Definition - an Industry Framework 22

23 09 June 2016 Product Governance Target Market Definition Industry Framework Florian van Megen, Retail Markets Specialist, IA 9 June 2016 Product Governance - Target Market Definition - an Industry Framework 23

24 SETTING THE (REGULATORY) SCENE FSA TCF/RPPD work from 2006 In order to avoid and reduce from an early stage potential risks of failure to comply with investor protection rules, investment firms manufacturing and distributing financial instruments should comply with product governance requirements. (recital 15 DD) Manufacturers create, develop, issue and / or design MiFID instruments or advise corporate issuers on the launch of new instruments Product approval process maintain, operate and review process for each financial instrument and for significant adaptations of existing instruments Proportionality Rules may be applied in a proportionate manner depending on complexity of product and target market. Definition could be simple for simple products compatible with needs and characteristics of mass retail market distributed execution only 09 June 2016 Product Governance - Target Market Definition - an Industry Framework 24

25 PRODUCT GOVERNANCE, APPROPRIATENESS AND SUITABILITY Article 16.3 The policies, processes and arrangements [ ] shall be without prejudice to all other requirements [ ] including those relating to disclosure, suitability or appropriateness, identification and management of conflicts of interests, and inducements. Differing roles of manufacturers and distributors accepted Manufacturers X-O distributors Advising distributors targeting to compatible clients Assessing appropriateness Assessing suitability 09 June 2016 Product Governance - Target Market Definition - an Industry Framework 25

26 A COMMON STANDARD FOR TARGET MARKET DEFINITIONS for all MiFID instruments, for all distribution channels, for the whole of EU, Joint efforts with EFAMA members across the Single Market for a data driven/automated exchange of information. Necessity for new systems? Similar requirements in Insurance Distribution Directive 09 June 2016 Product Governance - Target Market Definition - an Industry Framework 26

27 THE TARGET MARKET (LEVEL 2 DETAIL) TM Definition on theoretical basis for manufacturers, without specific knowledge of individual clients, with general view on how products are compatible with different investor types. Distributors should build their target market on that definition. 09 June 2016 Product Governance - Target Market Definition - an Industry Framework 27

THE DRAFT FRAMEWORK 1. Type of client at whom the product is targeted (MI) Retail, Professional, Eligible Counter Party 2. Expertise / Knowledge & Experience 3. Ability to bear losses 4.

28 THE DRAFT FRAMEWORK 1. Type of client at whom the product is targeted (MI) Retail, Professional, Eligible Counter Party 2. Expertise / Knowledge & Experience 3. Ability to bear losses 4. Client needs and objectives Usage, Return profile, Access, Time Horizon 5. Risk tolerance and compatibility of the risk / reward profile of the product with the target market 6. Compatibility of the intended distribution strategy (MI) 09 June 2016 Product Governance - Target Market Definition - an Industry Framework 28

29 FEEDBACK FROM DISTRIBUTION CHAIN Feedback necessary to oversee distribution to investors in-/outside target market. Feedback on Gross in- and out-flows Comment By fund name, ISIN and distribution channel AUM Identifier of distributor and intermediate unit holder Client type Appropriateness test results Retail, professional, eligible counterparty (currently still under discussion) 09 June 2016 Product Governance - Target Market Definition - an Industry Framework 29

30 CONTACT: Florian van Megen 30

31 09 June 2016 FCA Competition Study catalyst for change? Clive Cunningham, Partner, Financial Services Regulation, Herbert Smith Freehills LLP Product Governance - Target Market Definition - an Industry Framework 31

32 09 June 2016 EBA Investment Firm Report A new prudential regime for investment firms? Johannes Woelfing, Regulatory & legal specialist 00 Month YEAR Presentation title runs here [Go to Header & Footer to edit this text] 32

33 CURRENT PRUDENTIAL REGIME Prudential requirements for UK investment firms are set by CRD IV. CRD/CRR apply directly to institutions National supervisors can set the prudential requirements for a subset of firms to CRD III standards (BIPRU) 33

34 CURRENT PRUDENTIAL REGIME Prudential requirements for UK investment firms are set by CRD IV. client money permission; or dealing on own account CRR/CRD IV investment firm full CRD IV rules subject to MiFID subject to CRD NO client money permission; AND NO dealing on own account firm referred to in Art. 4 (1) 2 (c) CRR CRD IV allows to apply the old CRD III rules 34

35 APPLICATION OF CRD/MIFID IN THE UK 35

36 APPLICATION OF CRD/MIFID IN CONTINENTAL EUROPE 36

37 REVIEW OF CRD IV Legal basis Article 508 CRR requires the European Commission to report to the European Parliament and to the Council on an appropriate regime for the prudential supervision of investment firms and of firms referred to in points (2)(b) and (c) of Article 4(1). Process Commission issued in December 2014 a call for advice to the EBA to assess whether the current prudential requirements applicable to investment firms (including exemptions therefrom) are appropriate. EBA published its report on investment firms in response to the Commission s call for advice in December The Commission s report on an appropriate regime for the prudential supervision of investment firms will be published in summer

38 FINDINGS Current regime is based on MiFID permissions, not activities Overly complex Inadequacy of risk sensitivity 38

39 PROPOSALS A new categorisation of investment firms based on: Activity bank-like activities? Complexity Interconnectedness, systemic importance Wind-down arrangements 39

40 PROPOSALS New categories: 1. Firms that are deemed systemic or otherwise present a clear risk to financial stability in normal conditions. Substantial undertakings that run bank-like intermediation and underwriting risks at a significant scale. Exposed to credit risk, in the form of counterparty risk, and market risk for positions taken on own account. 2. Firms of lesser systemic importance, not bank-like investment firms. 3. Small and non-interconnected firms, easy to wind down in an orderly manner. 40

41 IA APPROACH A comprehensive review of the prudential framework for investment firms Prudential requirements based on key risks Gone-concern approach No duplication of prudential requirements in product regulation Appropriate conduct and remuneration requirements 41

42 IA ADVOCACY We will: Support the EBA approach; Provide the Commission with information about the implications for the UK market; Coordinate with other European trade associations; Engage with national supervisors and governments in Europe. 42

43 CONTACT: Johannes Woelfing 43

44 09 June 2016 Guy Sears, Interim CEO, The Investment Association Product Governance - Target Market Definition - an Industry Framework 44

45 09 June 2016 Panel Session (Q&A). Product Governance - Target Market Definition - an Industry Framework 45

46 09 June 2016 Thank you

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