EY Time to take action on MiFID II

1 MiFID II: Time to take action Wealth & Asset Management 3. Contents Introduction 1. MiFID II summary 2. Key considerations 4. Impacts and opportunities 6. What's next 7. 4. Markets in Financial Instruments Directives ( MiFID II) will bring about fundamental changes to distribution of wealth and asset management products and services in the EU. Relationships will change, and the winners will be those who adapt their strategies and have the operational capability to respond effectively to the new environment.. Introduction Business implications for wealth and asset managers Pro tability Margins are likely to be put under pressure: the combination of the requirements will bring about change to products, how they are distributed, operating models across the business and pricing and cost structures.

2 Products Fewer products are likely to be offered. There will be a greater focus on alignment of product and customer pro les. Model portfolios are expected to be a greater feature. Distribution More scrutiny is needed by providers as to how and by whom their products are distributed and how they communicate with distributors and end investors. The number of distributors is expected to fall. Platforms are likely to grow further. Independents may nd distribution more challenging. Technology will open up new distribution and advice models. Operating models market infrastructure changes will force operating model changes in the impacted business models.

3 Inducement and distribution requirements, combined with technology changes, will require operational change and force new distribution models. Pricing and costs Greater awareness of cost base and product pro tability will be required. The changes themselves will have implications for pricing and costs. Key issues Increased pre- and post-trade transparency around equity and non-equity markets, including the development of a Those areas of particular interest to wealth and asset managers consolidated tape for post-trade data and service providers include: Widening the application of the rules to a wider range of Investor protection/distribution commodity derivatives and including position limits around such derivatives An EU-wide ban on independent nancial advisers or discretionary portfolio managers accepting or retaining Stricter controls on algorithmic trading payments/inducements effectively banning payment Open, non-discriminatory access to trading venues and central or retention of retrocessions or commissions to or by counterparties vertically integrated trading venues and independent advisers or managers central counterparties (CCPs)

4 To open up after a Regulatory powers to ban products likely to lead regulators transition period to increasingly focus on product development, oversight and Governance targeting of products Enhanced provisions around suitability and appropriateness, Enhanced requirements around governing bodies of particularly in relation to complex products investment rms, including around diversity and compliance, as well as ensuring that members have suf cient time to Alignment of the Insurance Mediation Directive II with the undertake their duties investor protection provisions of MiFID II. Access by third-country rms market structures and transparency A harmonized regime for granting access to EU markets for Increasing requirements for formalization of internal matching rms operating from third countries, dealing with professional and crossing systems across different nancial instruments investors and eligible counterparties, based on equivalence assessment of third-country jurisdictions by the European Limiting the volume of business that can be dealt on so-called Commission.

5 Where rms are dealing with retail customers, dark pools Member States may require a branch to be established in their jurisdiction 1. MiFID II summary What is driving MiFID II? Since its implementation in November 2007, MiFID has been the cornerstone of capital markets regulation in Europe. Since its inception, however, not all bene ts have been fed down to the end investor as envisaged. MiFID II is aiming to address the shortcomings of the original MiFID release and respond to lessons learned during the nancial crisis. The diagram below highlights the key areas of focus and core measures of MiFID II, of particular interest to wealth and asset managers.

6 Figure 1. Core provisions MiFID II objectives and core measures Enhanced governance with prescription around governing board and committee Core provisions composition, tness and Restrictions on commodity propriety, and time commitment derivatives positions Tone from the top . Reporting requirements to regulators External Internal Third-country regime for controls/ controls/. Core provisions professional and eligible reporting governance counterparties based on Mandatory position limits on equivalence test by EU commodity derivatives Commission MiFID II Introduction of organized trading Investor market facility (OTF) for non-equity protection structure instruments Limitation on trading away from market regulated markets/MTFs ( , dark pools).

7 Transparency Core provisions More restrictive regime for high- Regulatory oversight of product, frequency/algorithmic trading including ban or limitations on Open access to trading venues, marketing to retail investors CCPs and benchmarks Revised suitability and appropriateness regime especially for complex Core provisions products with embedded Increased regulatory and derivatives (including UCITS). client reporting requirements Ban of inducements to for all asset classes independent advisers and discretionary managers and Near-real-time reporting requirements to regulators more stringent disclosure regime for payments paid and received Development of European consolidated tape The European regulatory reform program is fast becoming a reality that will transform the investment industry.

8 Alongside EMIR, CRD IV, structural change and Solvency II, MiFID II is one of the key regulatory initiatives that will change the market structure and business models. Firms that manage the regulatory agenda as part of their strategic evolution and maintain exibility will capture market opportunities that elude those that view implementation merely as a compliance task.. - John Liver, Partner, Head of Global Regulatory Reform, Ernst & Young LLP (UK). MiFID II: Time to take action Wealth & Asset Management 2. What is the timetable for implementation? Political agreement was reached on MiFID II in January 2014, revised market Abuse Directive II (MAD II).

9 It is also intended that and the European Parliament formally adopted the new rules on investor protection requirements should be applied equally to 15 April 2014. It was formally published in the Of cial Journal insurance-based investments through the Insurance Mediation on 12 June 2014. Member States must introduce the necessary Directive (IMD II) and the Packaged Retail and Insurance based national rules by 3 June 2016, and these must apply from Investment Products Directive (PRIIPS). 3 January 2017. The European Securities and Markets Authority (ESMA) is given responsibility for drafting a wide range of detailed rules (Level 2), which will be developed during the transitional period, and it will consult on these.

10 It will then have responsibility for coordinating implementation across Member States, working with national regulatory authorities. The timing is set to coincide with the 3. While much of the focus around MiFID II has been on the market structure and transparency changes, regulators at both domestic and pan-European levels are focusing on investor protection issues. It is important not to overlook the signi cant implications MiFID II will have in terms of how rms conduct themselves and behave towards their customers.. - Sheila Nicoll, Senior Adviser, Ernst & Young LLP (UK). Key considerations The implications of the proposed changes are extensive, and suf ciently wide range of instruments from a range of providers, questions remain around the practicality of some of the changes, not just the rm's own products.