2nd PwC MiFID II Breakfast Impacts on revenues, product shelves and execution chains

www.pwc.lu/mifid

Regulatory Advisory Services

March 2015

1 Inducement ban – Does MiFID II align with national regimes? 1

2 Product shelves – Cost factor or differentiator?

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3 Governance – new concepts?

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4 Markets – How will the execution chains change?

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5 PwC MiFID II Navigator

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Contents

PwC

March 2015

MiFID II impacts on full value chain

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

In House AM/IB

3rd Party AM/IB

Information Inducements

Proprietary Distributors

3rd party Distributors

Product Development Product Placement

Product Approval Process

Service Model

1 2 3

Cli

en

ts S

eg

me

nt

Service Level

Service Level Product Shelf Distribution

set-up

Independent Advice

Portfolio Mgt

Execution only

Dependent Advice

Product Needs

PwC

March 2015

Inducement ban – Does MiFID II align with national regimes?

Section 1

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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PwC

March 2015

Distribution requires advisory fees and transparency (Art. 24 & 25 Level 1; Sections 2.12 to 2.18 ESMA Final Report)

Section 1 – Inducement ban – Does MiFID II align with national regimes?

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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Information disclosure

Inducements

Product range

Suitability / Appropriate- ness

Advice Portfolio Management

Non Independent

Independent

Ban or Repayment

Balance of Product

Range

• Client profiling – criteria added • Suitability review – Monitoring of products vs. clients

Product Placement

Execution Only

Conditional

Complex financial instruments -

extended definition

• Type of advice & target market • Cost of advice & cost of products • Execution & target market review

PwC

March 2015

Third party inducements are under scrutiny (Art. 24 Level 1 & Art. 26 MiFID I; Section 2.15 ESMA Final Report)

3

Stricter quality enhancement test New regime on investment research

Investment research not considered as an inducement if received in return for: • Direct payments out of the firm’s own resources • Payments from a separate research payment account

(strict conditions attached)

Non exhaustive list of inducements not enhancing quality 1. Not justified by the provision of a higher/additional level

of service 2. Directly benefits the recipient without tangible benefit for

the client 3. Not justified by the provision of on-going benefit (if

ongoing inducement)

Inducements received

Inducements paid

Allowed if disclosed & enhance the quality of the service

Allowed if disclosed & enhance the quality of the service

Forbidden (incl. research ) except minor non-monetary benefits (exhaustive list) if disclosed & enhance the quality of

service

Investment/Ancillary services (other than PM & independent advice)

Portfolio Management & Independent Advice

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

Section 1 – Inducement ban – Does MiFID II align with national regimes?

Execution Only Non Independent

Advice Advice Portfolio Management Independent

1

2

1

1 2

PwC

March 2015

National inducement regimes are multiplying

Section 1 – Inducement ban – Does MiFID II align with national regimes?

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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UK (2012) • RDR : post 2012 • Commission ends: Adviser Charges introduced • Client Clarity : Independent / restricted / no

advice choice • Higher adviser qualifications

(Level 4) required

Netherlands (2013) The Dutch Government has banned commissions on retail investment products from 2013 to force advisers to be more transparent with clients about costs

MiFID II (2017) • MiFID II and MifiR – potential ban on commissions for

discretionary portfolios and independent advice • Restricts which products can be sold through execution only,

restrictions on bundling products and services • Links to KIID and PRIPs

Switzerland (2012) • Retrocession ruling

• A position paper has been published covering similar requirements as MiFID and Swiss Government is preparing a proposal for a new financial services act.

Australia (2013) • Future of Financial Advice (FOFA) regulation is in

effect from July 2013

• Key focus areas of FOFA

– Ban on commission on risk insurance products

– Addressing cost of advice

– Clients mistrust of financial planners

– Complexity in the planning process

– Appropriateness of complex/simple advice solutions

Source: PwC Analysis NB: Some of these regulatory developments are proposals and therefore are directional and thematic, with final rules expected later.

Sweden (2015) • Ban of inducements for independent or non-

independent advisers to “non-professional clients” that are not in the best interest of clients

• Prohibition for independent advisers to advice on related party products

PwC

March 2015

Comparative analysis of inducements “ban” regimes

Section 1 – Inducement ban – Does MiFID II align with national regimes?

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Banned (grandfathering clause)

Investment advice Other investment or ancillary services

Portfolio management

Retail clients Banned

(no grandfathering clause)

Retail clients (located in UK)

Retail clients Banned

- *except if in the best interests of the clients (to be adopted)

Banned

Non Independent

Independent

Nature of the service provided Clients in relation to

which the ban is applicable

Retail AND professional

clients

Retail clients

*Proposition of the Swedish government, law not yet adopted

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

Banned (court case) (explicit client waiver)

Banned - except if explicit client waiver (to be adopted)

PwC

March 2015

Product shelves – Cost factor or differentiator?

Section 2

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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PwC

March 2015

Service Mix & Service Level

MiFID II transforms products into a cost factor Main impacts on product shelf

Section 2 – Product shelves – Cost factor or differentiator?

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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Inducement Ban/Restriction (Art. 24 Level 1; Section 2.15 ESMA Final Report)

Balancing, Cost Transparency &

Reporting (Art. 24 Level 1; Sections 2.13, 2.14 and 2.20

ESMA Final Report)

1

2

3

PwC

March 2015

Governance – new concepts?

Section 3

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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PwC

March 2015

MiFID II enhanced governance concepts

Section 3 – Governance – new concepts?

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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Limitation of mandates

Increased Accountability

Remuneration policy

Telephone conversations

Electronic communications

Face to face meetings

Risk-based monitoring programme

Complaints management function

Management body

Recordings Compliance

function

Rise no. of independent board members

Implement data recording and storage

Increased duties and formalisation

PwC

March 2015

Markets – How will the execution chains change?

Section 4

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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PwC

March 2015

The classification of markets

Section 4 – Markets – How will the execution chains change?

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EUREX, NYSE

• Multilateral system operated by a market operator • Non-discretionary execution • Not allowed to execute orders against proprietary capital or matched

principal trading

Regulated market (RM) 1

Chi-X Europe

• Multilateral system operated by an investment firm or market operator • Non-discretionary execution • Not allowed to execute orders against proprietary capital or matched

principal trading

Multilateral trading facility (MTF) 2

All financial instruments

Only non-equity instruments (bonds, structured finance products, emission allowances or derivatives)

• Not allowed to act as a multilateral system • Best execution policy • Executes against proprietary capital outside TV • Either pre-condition as SI are met or investment firm opts to act as SI

Systematic internaliser (SI) 4 • Equities • Equity like instruments

(ETFs, depositary receipts) and • Non-equity instruments

(bond, structured finance products, emission allowances, derivatives)

Trading Venues

(TV)

Broker crossing system

• Multilateral system not regulated as RM or MTF • Best execution policy • Can matched principal trading where client consents and no EMIR

clearing obligation applies

Organised trading facility (OTF) 3 New

Re- defined

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains March 2015

• Not a TV nor a SI but offering investment service • Best execution policy

Investment firms (IF) 5 Re- defined Trading obligations

Chinese Wall: OTF and SI activities are not permitted in the same legal entity and no interaction of orders between OTFs and SIs.

PwC

March 2015

• Acts as an IF • Has to transmit a transaction report to the NCA • Has to make public the details of the deal (post-trade transparency) • Has to follow best execution policy

Exemplary Equity Order Flow (against market)

12

The order is transmitted to the CRM of the bank

The bank executes the order on a trading venue in a separate account

2 1

3 2

Bank

2

Client Bank Trading venue

1 3 2

Transaction report

Pre-trade transparency

Post trade transparency

Post trade transparency

• Designation to identify the client on which behalf the trade was conducted

• Designation to identify the trader or algorithm

via RTO and not on own account

Best execution

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

Section 4 – Markets – How will the execution chains change?

PwC

March 2015

PwC MiFID II Navigator

Section 5

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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PwC

March 2015

PwC MiFID II Navigator helps clients to manage their MiFID II projects end-to-end

Section 5 – PwC MiFID II Navigator

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution chains

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PwC has developed a technical solution to support the implementation of measures to meet regulatory requirements

Using this tool, the MiFID II / MAR requirements are completely reproduced and mapped to your organisation structure, as it combines the regulatory view with your organisational setting

Furthermore, links are established to the various Level 2 and Level 3 texts

Using the tool makes it possible for you to manage the full complexity deriving from MiFID II / MAR in a simple and structured manner

The texts and their interpretation are kept up to date using an established connection to our EU Regulatory Intelligence Head of Competence in Brussels

In this respect, at any point in time, PwC can provide you with a summary of the MiFID II / MAR impacts at various levels

PwC

March 2015

PwC MiFID II Navigator facilitates and manages the impact assessment, gap-analysis and implementation

Section 5 – PwC MiFID II Navigator

2nd PwC MiFID II Breakfast • Impacts on revenues, product shelves and execution

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Best execution - annual reporting “top 5 trading venues”

Higher sanctions in case of misconduct

Higher criteria for qualified senior management

Regulation of third-party (non-member) states

Transparency requirements (MTF, OTF, SI)

Ban on marketing & distribution of certain products

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Dependent / independent advice (e.g. inducement ban)

Enhanced periodic information obligations

Recordings of orders by telephone & electronic communication

Intended target market for new products

Increased transparency of cost of product and advice

Higher information standards for eligible counterparties

Enhanced suitability and appropriateness testing

Post-trade transparency for OTC transactions

Higher requirements for algorithmic trading

Emission certificates classified as Financial Instrument

Trading derivatives through official platforms

Position limits for commodity derivatives

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Example: MiFID II topics (not exhaustive):

Articles are mapped to relevant client business functions

Articles are completely reproduced in the tool

Existing gaps and related tasks are identified

Impacts on client are documented

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This publication has been prepared for general guidance on matters of interest only, and does not

constitute professional advice. You should not act upon the information contained in this publication

without obtaining specific professional advice. No representation or warranty (express or implied) is given

as to the accuracy or completeness of the information contained in this publication, and, to the extent

permitted by law, PricewaterhouseCoopers, Société Coopérative, its members, employees and agents do

not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone

else acting, or refraining to act, in reliance on the information contained in this publication or for any

decision based on it.

© 2015 PricewaterhouseCoopers, Société Coopérative. All rights reserved. In this document, “PwC”

refers to PricewaterhouseCoopers, Société Coopérative which is a member firm of

PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Olivier Carré PwC Luxembourg, Partner, MiFID II Leader

2, rue Gerhard Mercator L-1014 Luxembourg

Telephone: +352 49 48 48 4174 E-Mail: olivier.carre@lu.pwc.com

Join us on www.pwc.lu/mifid or www.mifid2.lu