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CFA Society Switzerland FIDLEG event
Latest developments | Synergies with MIFID II
Legal FS Regulatory & Compliance Services
Dr. iur. Simon Schären, LL.M.
PwC Zürich
Zürich| 12. December 2016
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Agenda
FIDLEG – Recent Developments1FIDLEG – Relevant Topics Overview2FIDLEG and MiFID II compared – leveraging synergies 3
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Training requirements
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FIDLEG – Recent Developments
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Overview
FIDLEG
FINIG
Code of conduct with respect to financial services
related to financial instruments
Licensing and supervison of financial institutions
FinfraG• Financial Markets Infrastructure Regulation
• OTC-Derivatives Regulation
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FIDLEG/FINIG – overview
• The Federal Council has issued draft bills of the FIDLEG and FINIG, which were published in November 2015 and will be debated in Parliament
o The aim of FINIG is to provide uniform regulation of the supervision of all financial services providers that conduct asset management activities of any kind
o The FIDLEG aims primarily to improve client protection and to create uniform competitive conditions
o FIDLEG/FINIG, along with the Financial Markets Infrastructures Act (FMIA/FinfraG), shall ensure that Swiss law is in line with international standards and will be deemed equivalent to MiFID II
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Adoption
PreliminaryDraft
Legislative Procedure in Switzerland
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Parliament
Federal Council/
Administration
Cantons
1. Initiation and Preparation preliminary draft
ParliamentInitiative
MotionPostulat
General Proposal right
State Initiative
ConsultationTemplate
BotschaftDraft
5. Parliament
Entry
Parliamentary Procedure
6. Publication and possible Referendum
7. Effectiveness of legislative act
Publication
Publication of Referendum
Effectiveness5 days after
publication at the earliest.
Currently the Council of States has to decide on thecomments of the Economic Affairs and TaxationCommittee “EATC-S”.
After the receipt of the proposal of the Council ofstates the National council will consider the draft.
Current Status of FINIG/FIDLEG:
The chambers of the Parliament considers the draftand “Botschaft”
1. Council of State debates the draft in detail;
2. National Council debates the draft in detail;
3. Consensus between the two chambers.
Vote
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Estimated Timeline FINIG/FIDLEG
2018
January 2018
Entry into force??
June 2014Commencement of the consultation process regarding FINIG/FIDLEG
201720152014
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March 2015Federal Council acknowledges the results of the consultation process.
2016
November 2015Publication of the “Botschaft” and submission to the Parliament.
October 2015End of consultation process
June 2016The Economic Affairs and Taxation Committee “EATC-S” of the Council of States started its detailed considerations.
3 November 2016Publication of EATC-S comments in the so called “Fahne”.
December 2016Council of States will consider and decide on EATC-S detailed comments.
Spring 2017The National Council will consider the draft and most likely submit it to its EATC for further detailed comments.
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FIDLEG/FINIG – latest developments
• On 24 October 2016, the Commission on Economics and Taxation (WAK-S) of the Swiss Council of States (Ständerat) proposed, inter alia, the following important amendments/changes to the draft provided by the Federal Council:
o Insurance companies should be carved out from FIDLEG; relevant amendments would, instead, be made to the Insurance Supervisory Act (ISA) if deemed necessary in the near future
o External (independent) asset managers shall be regulated by an independent supervisory organization whereby all public supervisory functions, including enforcement, would remain with FINMA
o New license categories for enterprises active in the FinTech sector should be created, including a "sand box"-area where companies can perform bank-like activities without a license; this should be achieved by amending the Banking Act (BA) and the Banking Ordinance (BO) along with the introduction of FIDLEG and FINIG
• The proposed amendments will be subject to the winter debate of the Swiss Council of States whereby the topic of FIDLEG and FINIG is scheduled for 14 December 2016.
• Commission of National Council (vorberatende Kommission Nationalrat) is expected to discuss bill already in early 2017
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FIDLEG – Relevant Topics Overview
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Definitions and priciples
• Key definitions (Art. 3 E-FIDLEG)
o Financial service providers
persons who “provide financial services on a professional basisin Switzerland or for clients in Switzerland”
o Financial services include:
o acquisition or disposal of financial instruments;
o reception and transmission of orders in relation to financialinstruments;
o portfolio management;
o investment advice;
o custody of assets on behalf of clients;
o keeping accounts and granting loans to finance transactionswith financial instruments.
o Financial instruments
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Client segmentation (1/2)
Institutional clients Professional clients (except for [i] companies with treasury operations and [ii] pension schemes), including national/supra-national public entities
1Professional clients • Supervised financial intermediaries
• central Banks • certain public entities• certain pension schemes• companies with treasury operations
2Private Clients
All clients that are not deemed to be professional clients (= retail clients) 3
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Client segmentation (2/2)
Professional Clients
Private
Clients
(HNWI)
Institutional
Clients
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opting-in
opting-out
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Code of conduct
• Principles of Code of Conduct (Art. 8 ff. E-FIDLEG), especially
o Acceptance of benefits (Art. 28 E-FIDLEG)
o Consolidation of legal duties in relation to disclosure and documentation(Art. 11 E-FIDLEG)
assessment of suitability and appropriateness
• Enhanced duty to engage in professional education and to register for clientadvisers (Art. 30 E-FIDLEG)
• Registration duty for foreign financial service providers (Art. 30 ff. E-FIDLEG)
• Prospectus for securities and Key Information Document (Art. 37 ff. E-FIDLEG)
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Requirements on business conduct
• New duties on providing information to clients (content, form and time)
o Disclosure of services and interests (incl. retrocessions, incentives)
o Suitability and appropriateness tests (incl. documentation)
o Information to clients about financial instruments, on risks and costs
• Documentation of services provided to clients
o Advisory Protocol
o Prospectus and KID
o Ensure to provide clients with a copy of the documentation
• Differentiation between professional clients and retail clients
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Suitability and appropriateness tests (1/2)
• Appropriateness test according to Art. 12 E-FIDLEG
o Investment advice with respect to individual transactions without considering the whole client portfolio
Is recommended financial instrument appropriate for client?
Factors: Knowledge and experience
• Suitability test according to Art. 13 E-FIDLEG
o Investment advice whereby the whole client portfolio is taken into account and/or portfolio/asset management services are performed
Is financial instrument subject to advice or investment suitable for client?
Factors: Knowledge and experience, financial situation, investment goals
Investment advice with respect toindividual transactions
Portfolio management/ investment advice (considering whole portfolio)
Suitability test based on clients’ knowledge and experience
Appropriateness test based on clients’ knowledge and experience, financial situation and investment goals
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Suitability and appropriateness test (2/2)
• Tests are required for institutional clients/professional clients only if there is an indication that the client is not experienced/knowledgeable
• No tests required (not even with respect to complex products) in execution- only relationships (only duty to warn of risk of transactions)
• If product or service appears inappropriate or if not enough information is available to perform tests there is a duty to inform about absence of test
• If financial services provider comes to conclusion that financial instrument is not appropriate/not suitable for client advice not to invest
• Presumptions with respect to professional clients
• Exemptions apply depending on type of transaction
o execution-only transactions/submission of client orders
o Reverse solicitation
Information of client about absence of test
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No rules regarding independence
• The original draft provision of Art. 9 FIDLEG contained the following independence rules for independent investment advice:
o a sufficient number of financial products available in the market must be taken into consideration (open architecture)
o no incentives may be received
• As opposed to the MiFID rules, E-FIDLEG does not contain any requirements for designation as an independent financial institution any more
• Art. 9 of the original draft of FIDLEG contained such a rule before it was abolished in the draft version of the Federal Council; no rational was provided
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FIDLEG and MiFID II compared –leveraging synergies
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adaptation landscape – oversimplification
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MIFID II
FDLEG Swiss Regulation
EU Regulation
In draft formautonomous
adaptation
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adaptation landscape - reality
FinfraG
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EMIR MIFID II
FDLEG FINIG Swiss Regulation
EU Regulation
In force In draft form In draft formautonomous
adaptation
MIFIR PRIIPs
FINMAG
In force
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Background information
Timeline
Comparison of MiFID II
and FIDLEG
• In its effort to harmonise the Swiss laws on financial markets with international financial markets regulation and in light of development in civil law regarding the treatment of EEA domiciled clients, Switzerland intends to implements MiFID II standards by passing the proposed Finanzinstitutsgesetz(“FINIG”) and the Finanzdienstleistungsgesetz (“FIDLEG”).
• FINIG intends to regulate the authorisation and supervision of financial services providers,
• FIDLEG intends to lay down rules on how financial service providers conduct their business, in particular at the point of sale.
• FIDLEG aims at enhancing Swiss investor protection establishing equal conditions for all participants in the Swiss financial market.
Generally, the draft FIDLEG provisions on investor protection are in line with MiFID II. However, there are three major areas of difference where the FIDLEG offers more flexibility regarding certain conduct of business standards. This flexibility spells out a risk of being considered as falling short of investor protection standards applied by EU countries and therefore is a potential basis for civil law claims.
1. Client Classification: Should FIDLEG follow Swiss CIS Ordinance rules, FIDLEG is expected to include a more flexible approach regarding the opting-up of clients. This would allow the opting-up of retail clients with more than CHF 5m in invested assets.
2. Inducements: draft FIDLEG is less stringent as firm can accept inducements if properly disclosed to the client.
3. Appropriateness in the context of non-contracted advisory: draft FIDLEG does not require appropriateness check for execution-only transactions.
Jun 2014
End of consultation
Nov 2015
Bill (exp.)
2018Oct 2014
Begin of consultation
Dispatch to National Council/Council of the
States
Winter 2016
Entering into force?
Comparison between MiFID II and FIDLEG (1/6)
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Comparison between MiFID II and FIDLEG (2/6)MiFID II Topics Mirrored in
Third Country Third country access Neither mirrored in FIDLEG nor in FinfraG
Organisational requirements
Other
Recording Neither mirrored in FIDLEG nor in FinfraG
FIDLEG
Market Structural Reforms
Access to CCPs and trade venues
Automated Trading / HFT / DEA
Trading venue regimes - equities
Trading venue regimes - non-equities
FinfraG
FinfraG
FinfraG
FinfraG
TransparencyPre/post trade transparency
Transaction reporting
FinfraG
FinfraG
FIDLEG Investor Protection
Neither mirrored in FIDLEG nor in FinfraG
FIDLEG
Best execution
Client assets / complaint handling
Client classification
Conflicts of interest
Inducements / Independent advice
Information to clients
Product design and governance
Suitability and appropriateness
FIDLEG
FIDLEG
FIDLEG
Neither mirrored in FIDLEG nor in FinfraG
FinfraG
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MiFID II topic
Generally, the draft FIDLEG follows MiFID II. However, some of the requirements go beyond what is required by MiFID II. In addition, the draft FIDLEG introduces rules regarding the registration of client advisors and legal recourse.
Mirrored in FIDLEGFIDLEG compared
to MiFID II
Product design and governance x N.A.
Conflicts of interest lower standard
Client assets / complaint handling x N.A.
Suitability and appropriateness
partially higher standard
In general, the current draft FIDLEG text follows MiFID II conduct of business standards. In two particular instances, requirements go beyond MiFID II:
• Information to clients:With regard to product specific information, FIDLEG requires a Basic Information Sheet for all financial instruments / products other than securities and a prospectus for securities that are publicly offered or admitted to a market.
• Suitability and appropriateness:With regard to suitability reports, FIDLEG requires a written documentation (“Advisory Protocol”) in case of a personal recommendation for financial instruments, documenting client needs and reason for the recommendation, currently for both investment advisory and portfolio management.Under MiFID II, such written documentation is only required for recommendations related to investment advisory. For portfolio management, a periodic reporting has to be provided.
Client classification comparable standard
Information to clients
partially higher standard
Inducements comparable standard
Comparison between MiFID II and FIDLEG (3/6)
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The draft FIDLEG is broadly geared towards MiFID II conduct of business standards. Exceptions however apply for certain client classification and information requirements. Final provisions pending publication of Level 2 text.
FIDLEG compared to MiFID II
CommentsTopic
Client classification
General information at onboarding
Information about specific services
Information about specific products
Info
rm
ati
on
to
Cli
en
ts
• In principle aligned. Overall FIDLEG is less granular with a narrower definition of “institutional clients”, there is no possibility for Professional Clients to opt up to ECPs.
• Opting-up / down is currently only generically regulated; final rules pending.
comparable standard
higher standard
comparable standard
comparable standard
• In principle aligned, however FIDLEG is less granular. Final provisions depend on regulation ordinance.
• In addition to MiFID II rules on client information, FIDLEG requires information to clients in context of discretionary mandates.
• Goes beyond MiFID II (and PRIPS) by requiring Basic Information Sheet for all financial instruments / products other than securities, i.e. including plain vanilla bonds. Prospectus even after secondary offering and each time if admitted on a second platform.
Comparison between MiFID II and FIDLEG (4/6)
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TopicFIDLEG compared
to MiFID IIComment
Appropriateness Assessment
Suitability Reports
Periodic Assessment of
suitability
Info
rm
ati
on
to
Cli
en
ts
• In principle aligned. Diverging rules apply to the extent that MiFID II requires suitability check at financial instrument level, while FIDLEG allows it at portfolio level.
comparable standard
higher standard
comparable standard
comparable standard
• FIDLEG does not distinguish between complex/non-complex products i.e. higher standard apply for suitability checks however lower standard insofar as no appropriateness check required for execution-only transactions.
• FIDLEG requires a written documentation (‘Advisory Protocol’) in case of a personal recommendation for financial instruments, documenting client needs and reason for recommendation, in current wording both for investment advisory and portfolio management.
• Under MiFID II, such written documentation is only required for recommendations related to investment advisory. For portfolio management, a periodic reporting has to be provided.
• In principle aligned. There is some likelihood of slightly higher standards under MiFID II following publication of Level 2 rules.
Suitability Assessment
Co
nfl
icts
of
inte
re
st
Independent Advice and Inducements
comparable standard
• FIDLEG scope is wider in principle as it applies to all financial instruments which includes bank account, safekeeping, execution only and execution of transactions.
• FIDLEG is less stringent as firm can accept inducements for portfolio management if properly disclosed and client has waived right to inducements.
Comparison between MiFID II and FIDLEG (5/6)
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Comparison between MiFID II and FIDLEG (6/6)
1) Probability that the current Delta will not exist anymore after final FIDLEG rules are into force, this means that FIDLEG rules are equal to MiFID II.
Assumption that FIDLEG will enter into force unchanged in the current draft version.
2) Expected (business) impact resulting from the Delta between FIDLEG and MiFID II.
Expected (business) impact2
Under MiFID II establish
systems for order recording.
Under draft FIDLEG, higher
flexibilty re the design of
remuneration policies.
Higher flexibility for product
manufacturers and
distributors under FIDLEG.
Broader range of products
could be offered under
FIDLEG.
Under FIDLEG more
flexibility in continuing to
receive inducements.
Broader product shelf
offering in execution-only
context.
Higher reporting
requirements under
FIDLEG.
Impact of FIDLEG and
MiFID II rules expected to
be comparable.
FIDLEG MiFID IITopic
Best
Execution
Record Keeping
Remuneration
Product
Governance/Target
Market
Client
Classification
Inducements
Suitability/
Appropriateness
Suitability
Statement
Information to
clients
Client assets/
Complaints handling
Conflicts of
Interest (CoI)
Ensure best possible result
for client when executing
orders.
Neither mirrored in FIDLEG
nor in FinfraG.
Neither mirrored in FIDLEG
nor in FinfraG (except
documentation).
Neither mirrored in FIDLEG
nor in FinfraG.
Opting-up for retail clients
with certain level of K&E
possible.
Can be received if properly
disclosed or transferred
client.
No appropriateness-test
when providing execution-
only services.
“Advisory Protocol” for
investment advice &
portfolio management.
Information at client
onboarding, and about
specific services, products.
Comparable provisions
neither mirrored in FIDLEG
nor in FinfraG.
Prevent CoI by
organizational measures.
Current Delta
Probability1
Ensure best possible result
for client when executing
orders.
Recording of
conversations/electronic
communication.
Remuneration must not
jeopardize duty to act in best
interest of the clent.
Product approval and review
process necessary.
A number of legal
prerequisites have to be
fulfilled to opt up clients.
Inducements in principle
banned.
EO transactions re complex
financial instruments AP-test
mandatory
Statement of suitability
when providing investment
advice.
Information at client
onboarding, and about
specific services, products.
Establish a complaint
management function and
policy.
Take approrpriate steps to
identify/prevent/manage CoI.
FIDLEG currently less
granular, further specification
expected.
Under FIDLEG/FinfraG
regulatory regime no
obligation for recording.
Under FIDLEG/FinfraG no
provisions re remuneration
rules.
Under FIDLEG/FinfraG no
provisions re product
governance/target market.
FIDLEG less granular. Opting
up/down only generically
regulated.
FIDLEG allows reception of
inducements, but broader
scope.
More flexibel approach under
FIDLEG.
FIDLEG broader in scope but
less granular.
In principle aligned. FIDLEG
currently less granular.
Under FIDLEG/FinfraG no
provisions re client
assets/complaints handling.
Requirements in principle
aligned; further specification
of FIDLEG rules pending.
High
Low
Medium
Medium
Medium
Medium
Low
Low
Medium
Medium
High
Impact of FIDLEG and
MiFID II rules expected to
be comparable.
Less organizational
measures required by
FIDLEG.
Impact of FIDLEG and
MiFID II rules expected to
be comparable.
Description
of Delta
Quantification
of Delta
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Training requirements
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FIDLEG – Training requirements per current draft version
• Client advisers must have sufficient knowledge of the code of conduct set out in FIDLEG and the necessary expertise required to perform their activities (Art. 6 para 1 E-FILEG)
− Financial service providers shall define industry-specific minimum standards for basic training and continuing professional development (Art. 6 para 2 E-FIDLEG)
− The Federal Council shall define the basic training and continuing professional development requirements for client advisers for whom minimum standards do not exist on the level of an ordinance (Art. 6 para 3 E-FIDLEG)
• Financial service providers shall ensure
– that their client advisers have the basic training and continuing professional development necessary for the services to be provided (Art. 7 para 1 E-FIDLEG)
– that clients can obtain information on the basic training and continuing professional development of their client adviser (Art. 7 para 2 E-FIDLEG)
• Details/standards are not yet known as industry-specific minimum standards are not yet available
• Standards (even in draft form) will not be available/accessible until the FIDLEG/FINIG bill is finalised
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New EBA/ESMA Guidelines
• 28. November 2016: A joint consultation paper was published by the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) concerning the assessment of suitability of members of management bodies and key function holders
• During the financial crisis, weaknesses in corporate governance structures have been identified
• Roles and responsibilities of management bodies need to be strengthened
• EBA and ESMA try to established standardized rules throughout the European Union for assessing the suitability of management bodies and key function holders
• Legal basis: Directive 2013/36/EU (CRD IV) and Directive 2014/54/EU (MiFID II)
• Next steps: consultation period closes on 28.01.2017. Final guidelines are expected to be published in Q2/Q3 2017
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Entities in scope
• Credit institutions
o Undertakings the business of which is to take deposits or other repayable funds from the public to grants credits from its own account
• Financial holding companies
o Financial institutions, the subsidiaries of which are exclusively or mainly institutions or financial institutions, at least one of such subsidiaries being an institution and which is not a mixed financial holding company
• Mixed financial holding companies
o A parent undertaking, other than a regulated entity, which together with its subsidiaries, at least one of which is a regulated entity which has its head office in the Community
• Investment firms
o Any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis
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Persons in scope
• Chief Executive Officer (CEO)
o The person who is responsible for managing and providing steer to manage the overall business activities of the institution
• Chief Financial Officer (CFO)
o The person that is primarily responsible for managing the financial resources and risks, financial planning and reporting and record-keeping
• Key function holders
o Persons who have significant influence over the direction of the institution, but who are not members of the management body. Such key function holders might include heads of significant business lines, EEA branches, third country subsidiaries and other internal control functions.
• Heads of internal control functions
o Persons at the highest hierarchical level in charge of effectively managing the day to day operation of the risk management, compliance and audit functions
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Third Country Firms in scope
• EEA branches of third country institutions
o Equivalent suitability requirements apply
o In scope are the individuals who effectively direct the branch
• Third country subsidiaries of EEA domiciled CRD-institutions
o Subsidiaries established in a third country are included in the scope
o The respective group wide policy needs to me implemented as long as this is not unlawful under the laws of the third country.
• EEA CRD-institutions if they are a subsidiary of a third country firm
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Adequate knowledge, skills and experience
• The assessment of adequate knowledge, skills and experience should especially consider knowledge and skills attained through education and training
• Consideration should be given to education and training in the following areas:
o Financial markets
o Banking and finance
o Legal requirements and regulatory framework
o Strategic planning (e.g. understanding of a business strategy and a business plan)
o Risk management (e.g. identifying, assessing, monitoring, controlling and mitigating the main types of risk of an institution)
o Assessment of the effectiveness of an institution’s arrangements, ensuring effective governance, oversight and controls
o Interpretation of an institution’s financial information, the identification of key issues based on this information and appropriate controls and measures
• Institutions have to provide sufficient resources for ongoing training which is a necessity to ensure sufficient knowledge about changes in the legal and regulatory requirements, markets and products, the business model and risk profile
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Contact
Dr. iur. Simon Schären, Attorney-at-law, LL.M. Manager, Legal FS Regulatory & Compliance Services
PricewaterhouseCoopers AGBirchstrasse 1608050 Zurich
Tel.: +41 58 792 14 63Mobil: +41 79 419 18 59Email: [email protected]
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