Impact of MiFID II on EU conduct of business regimes United - PDF document

Impact of MiFID II on EU conduct of business regimes United Kingdom April 2015

DISCLAIMER: The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points covered. In particular, it is not tailored to address questions or points relevant to your specific business model and you must therefore take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.

HEAT MAP Level 1 (final) Level 2 (final TA) Impact in UK Client categorisation Client order handling Conflicts of interest Client assets Inducements (generally) Third Party Payments ban Record-keeping Suitability Complaints handling Clear, fair and not misleading communications Reporting to clients Appropriateness / execution-only Best execution Product governance and distribution Investment advice Product intervention Recording communications Remuneration Information to clients Dealings with eligible counterparties Key: Significant change Moderate change Minor / no change

Firms in scope   • • Portfolio management firms Firms that only carry out ancillary services • Broker/dealers (i.e. firms that RTO) • UCITS firms that only sell UCITS • Firms who underwrite/place • Insurance /Reinsurance firms • Advisory firms • Insurance brokers • Non-advisory firms • Firms that only sell insurance-based • Firms that deal on own account * investment products or pensions • MTF / OTF / SI operators * • Banks / building societies • Commodity firms * • Consumer credit firms • Branches of non-EEA firms • Mortgage providers • Firms that operate various data reporting • AIFMs services * • Article 3 firms exercising an optional exemption * Products in scope   • Shares • Spot FX (although note the Commission’s non-paper on regulating • bonds spot fx) • Units in collective investment schemes • Insurance-based investment products (so UCITS, NURS and UCIS) • Pensions • Various structured products • Pure protection insurance products • Derivatives (i.e. options / futures / swaps / forwards linked to various underlyings • Bank accounts including securities, currencies, interest • Mortgages rates or yields, emission allowances , commodities financial indices, financial • Consumer credit products measures and settled in particular ways • Structured deposits * * New in MiFID II

How does it fit together with other EU ‘investor protection’ initiatives? • Applies to packaged • Applies to insurance- products so some of the instruments caught by both based investments (not MiFID II and IDD and caught by MiFID II) structured deposits • Proposed to introduce • Requires Key Investor investor protection items Document to be provided to covering similar topics to clients in sales process MiFID II but may not be • Can rely on PRIIPs KID to addressed in similar way satisfy MiFID II product • Regulatory arbitrage disclosure requirements • PRIIPs KID not required for across products • UK likely to gold plate UCITS – UCITS KIID can continue for now IDD PRIIPs UCITS MiFID II • Applies to firms selling • Applies to firms providing UCITS funds investment services and • Firms caught by UCITS ancillary services excluded from MiFID II • Covers most financial requirements instruments including • Separate remuneration, structured deposits product disclosure • Sets minimum conduct of regimes, etc. business standards • ESMA has recommended • Focus is on increased that the Commission transparency and harmonise the regimes in disclosure due course

Level 1 (Final) Client categorisation Conflicts of interest • No change to client categories (retail / professional • No change to existing regime • Amalgamation of Levels 1 and 2 of MiFID I / eligible counterparty) or opting up procedures • Discreet change to treat municipalities and local • Express statement that conflicts arise from public authorities as retail clients by default, with inducements and remuneration structures ability to become elective professional clients • National/regional governments and public bodies that manage public debt are not local authorities • Member States have discretion to design the opt up procedure Client order handling Complaints handling • Requirement to disclose unexecuted client limit • No significant change to MiFID I • Member States to notify ESMA of their out-of-court orders to the public extended to capture additional trading venues created by MiFID II complaints and redress procedures - ESMA • ESMA was not asked to provide technical advice intends to keep a list on its website Clear, fair and not misleading Client assets communications • No significant change to MiFID I • No direct change to current regime • Extension of fair, clear and not misleading regime to eligible counterparties Inducements (generally) Third party payments ban • Existing test for receiving third party payments • New EU wide ban on payments being received and remains – (i) enhance quality of service, (ii) be in kept (or off-set against fees owed to firms) clients’ best interest; (iii) be disclosed • Applies to retail and professional clients • ‘Minor non-monetary benefits’ excluded from ban • ‘Minor non-monetary benefits’ excluded from ban • Member States can gold-plate for independent advisers and portfolio managers • Confirmation of disclosure requirements to clients – must be accurate and periodic Suitability Appropriateness/execution-only • Requirement to assess suitability of product when • Appropriateness test remains the same • List of ‘non - complex’ financial instruments on which advising retail/professional clients remains • If advising on bundled/packaged product, overall appropriateness can be undertaken is narrowed • Explicit statement of what is a ‘complex’ product product needs to be suitable • New requirement for a suitability report for retail (including structured UCITS) • Appropriateness test always required where ‘credit’ clients provided Key: Significant change compared to MiFID I Moderate change compared to MiFID I Minor / no change compared to MiFID I

Level 1 (Final) Best execution Investment advice • Firms must publish top 5 execution venues • No change to definition of investment advice actually used each year, and to notify execution • New concept of ‘independent’ and ‘non - independent’ venue used for each trade advice • Must take “all sufficient ” steps for best execution • Parameters set that need to meet to give • Firms that RTO/place to have execution policies ‘independent’ advice • Policies to be tailored and detailed and material changes notified • Demonstrate best execution to regulators on request Record-keeping Reporting to clients • No significant change to MiFID I • Existing reporting requirements remain • Clarification that records are also required to allow • Extended to require ‘periodic’ reporting • Extends reporting requirement to also apply to regulators to fulfil their supervisory duties under other EU regulations and to demonstrate firms’ eligible counterparties compliance with rules related to ‘market integrity’ Information to clients Remuneration • New requirements for investment firms • Existing requirements remain and enhanced for : • Restrictions on incentive schemes, internal rewards  investment advice (with new ‘independent’ advice) and sales targets for staff  financial instruments (to implement product • New remuneration policy and procedure approved governance requirements) and overseen by senior management  costs and charges (aggregated and individual • Focus on responsible business conduct, fair costs, provided ‘in good time’ and annually treatment of clients, avoiding conflicts of interest, updated) clients’ best interests Recording communications Dealings with eligible counterparties • Exclusion from MiFID requirements for “eligible • Was optional, but now mandatory for certain firms counterparty business” remains to record calls and electronic communications that • Recitals extend some investor protection (could) result in a transaction requirements to ECPs as they are ‘clients’ • Records to be kept for 5 / 7 years • Obligation to act honestly, fairly and professionally • File note of face-to-face meetings with clients to be • Obligation to communicate in a manner which is fair, kept clear and not misleading • To receive certain information / reports Product intervention Product governance and distribution • Completely new regime for national regulators to • New EU wide product governance and distribution ban products and services regime • Complete new regime for ESMA / EBA under • Detailed obligations apply to product manufacturers MiFIR and EIOPA under PRIIPs to temporarily ban and, separately, distributors products and services on an EU wide basis or in specific Member States Key: Significant change compared to MiFID I Moderate change compared to MiFID I Minor / no change compared to MiFID I