suitability event

Suitability Event

Wednesday, 28 November 2013

1 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Agenda

08:00 Introduction Micha Bitterli, Partner, KPMG

Regulatory requirements at the Point of Sale Micha Bitterli, Partner, KPMG Ertugrul Tuefekci, Director, KPMG Pascal Sprenger, Director, Head of Legal Financial Services, KPMG Michel Simantirakis, Senior Manager, KPMG

Digitised Cross Border Manuals for Banking Michael Rombach, Engagement Manager, Appway

The Avaloq Investment Suitability Framework Rafael Keller, Product Manager, Avaloq Evolutions AG

09:30 Wrap-up, Q&A

09:45 Breakfast

Future Challenges

Micha Bitterli, Partner, KPMG


A constantly evolving environment

Main reasons for these changes ■ Increased frequency of financial crises with a global

impact over the last decade

■ High costs for tax payers as bank losses were "privatized" in the last crisis

■ Increasing government deficits/debts

■ Increased sense of injustice regarding tax evasion in the populace

■ General aversion against so-called tax havens

■ General public's loss of confidence in financial sector due to flighty business practices including aiding and abetting tax evasion

■ Broad support for (partially excessive) regulation of the banking industry in order to avoid future crises and for a sustainable adjustment in corporate cultures

States are becoming increasingly coordinated in their global hunt for untaxed assets and in the persuasion of governments to regularize unreported assets.

Performance

Governance

Growth

Regulation

Margin erosion

Investor inactivity

Corporate governance

Suitability/ Distribution

rules Tax Haven Black Lists

Transparency

Cross border regulation

FATCA

Business model

realignment

Basel III

Market place harmonization

Data secrecy

Dodd Frank Act

MiFID

AIFMD

Cooperation/ outsourcing

OECD Lists

Differentiation

Asset repatriation

International Tax

Agreements (UK/DE)

Capital requirements

Added-value services

FATF

Suitability Interaction with Suitability

AEI

US Tax

How are banks affected?


A selection of international regulatory initiatives. Can you keep up? E

U

Jan 2013 Feb Mar Apr May Jun Jul Aug Sept. Oct Nov Dec 2018 2015 2016 2017 2019

Glo

bal

N

AT

ION

AL

EMIR in force

Banking Union

SSM in force

CFTC swap in

force

MiFID2 final MEP

vote

MiFID2 Council

agreement

MAD/MAR

trialogue

EC EMIR level 2

measures Banking Union fully

in force EC

Liikanen update

EC FTT proposal

Basel 3 liquidity in

force

Basel 3 capital in

force

FSB GSIB surcharge

in force

FSB GSIBs fully

in force

Banking Union SRA in place

MiFID2 in force

UK - Vickers in

force

CRD4 Regulation in force

PRIPs in force

IMD in force

France - FTT

US DFA mandatory

clearing

RRD MEP vote

AIFMD final text

ESMA MiFID2 level 2

PRIPS / IMD MEP

vote Banking Union DGS

proposals

RRD trialogues

EC Shadow Banking

2014

Systemic risk and capital buffers

2014

Governance and supervision Customers and markets

CRD4 MEP vote

CRD4 Directive

Solvency 2 in force

PRIPS / IMD level

2

Audit reform

proposals

MEP Shadow Banking

vote Shadow Banking in

force

EC ESA review

EC LIBOR proposals

EC UCITS 6

UCITS 5 MEP vote

EC data protection proposals

EBA CRD4 /

CRR ITS consult

EBA CRD4 Home /

Host ITS

EBA RRP RTS

EMIR initial

margin in force

AIFMD national

implement

EMIR reporting in force

EMIR clearing

obligation

EBA stress testing

EBA Mortgage guidelines

CRA RTS

ESMA CSD ITS

ESMA Short selling

In force Consultation

FCA/PRA

FSB Shadow Banking

BCBS RWA

BCBS trading book

FSB GSIB list

G20 Leaders Russia

G20 Finance Russia

BCBS shadow banking update

FSB review of GSIBs

CFTC swap in

force FR – Bank separation proposal

DE – Bank separation proposal

Source: KPMG EMA Center of Excellence


Trading strategy Trade initiation Trade execution Settlement and clearing

Ongoing management

2 3 4 5 6 7 8 1 2 7 8 1 2 5 7 1 2 7 2 3 4 5 6 7

Financial counterparty

Non-financial counterparty

Exchange

Bilateral

Other regulated trading platform

Pre and post trade

reporting

CCP

Bilateral

Margin and collateral

Risk management

Asset, servicing and custody

Accounting

Transactions reporting

Close out

8

1. European Market Infrastructure Regulation (EMIR)

2. Markets in Financial Instruments Directive (MiFID 2)

3. BASEL 2.5/3

4. Fundamental review of trading book

5. Activities specific 6. Market Abuse Directive (MAD)

7. Dodd-Frank 8. Financial Market Infrastructures

(FMIs)/CSDs

How are banks affected - Transactions


Initially, financial institutions will be affected by sinking AuM and margins due to their portfolio adjustments. However, if they do this correctly, institutions will eventually improve their margins and acquire new AuM by expanding their range of products and services.

0

20

40

60

80

100

120

Yesterday Today Tomorrow Strategic state

Profitability

Transforming FI Non-transforming FI

30

40

50

60

70

80

90

100

110


Asset Base


60

70

80

90

100

110

120

130

140


AuM Margin


Transformation process

Note: Profitability of Transforming FI indexed at 100 / Profitability of Non-transforming FI relative to Transforming FI Asset base of Transforming and Non-transforming FI indexed at 100 AuM Margin for Transforming and Non-transforming FI in bps

Transition Process

Asset Transformation Process

Product Transformation Process

Service Transformation Process

Point of non-viability

Long-term viability

Transition Process


Long-term viability

Transition Process


Long-term viability

Suitability MiFID / FSA


MiFID / Financial Services Act (FSA)

MiFID

Best execution Inducements (retrocessions)

Outsourcing

Customer classification

Suitability & appropriateness

Risk structures,

organization

Conflicts of interest

Cross-border services

Distribution report / in content, FSA is very similar to MiFID


The EU Markets in Financial Instruments Directive (MiFID I) was passed on 21 April 2004

It replaced the Investment Services Directive (ISD) of 1993

It is part of the Financial Services Action Plan (FSAP)

The most important rules were introduced with the Lamfalussy procedures/directive (contains the Prospectus Directive, Market Abuse Directive, Transparency Directive, etc.)

MiFID was one of the most comprehensive reforms within the European Economic Area (EEA)

Important parts were implemented in local laws

Effective: 1 November 2007

MiFID I - Background


Strengthening the European financial markets – Robust and harmonized framework for regulating the European

financial market – MiFID I contained the "passport principle" which was introduced with

the Investment Services Directive The passport simplifies market entry in EEA countries Increases competition

Improved customer protection

– Conduct of Business Rules / Best Execution Rules – Client and product analysis – Requirements regarding information and disclosure

MiFID I - Objectives


Timeline MiFID II

2010 2011 2012 2013 2014 2018

April 2010

CESR consultation papers on MiFID review

December 2010

European commission releases substantial public consultation on the review of MiFID (MiFID II)

May 2011

Commission reports that proposals will be presented before end of 2011

October 2011

EC adopts formal proposals for a Directive repealing Directive 2004/39/EC (MiFID II) and for a Regulation on markets in financial instruments (MiFIR), which would amend the proposed European Market Infrastructure Regulation (EMIR)

March 2012

Markus Ferber suggests amending the EC’s proposal intended to further restrict high frequency trading

End Q4 2014

Expected release date of MiFID II and MiFIR. While MiFIR will become effective immediately, there will be an implementation period for MiFID II

1 January 2016

MiFID II locally implemented?

1 January 2017

FSA Report up and running

today

September 2008

Bankruptcy of Lehman Brothers

December 2008

Madoff’s sons tell authorities that their father’s firm was a massive Ponzi scheme


MiFID II - Introduction

Just like MiFID I, MiFID II is an important pillar for the European financial regulation MiFID II cannot be looked at in isolation but needs to be seen in context of other regulations. For a

comprehensive picture, the following regulations must also be looked at:

− MiFIR (Markets in Financial Instruments Regulation) Objective: improve transparency of financial markets, centralized trading platforms, improves regulation and competition

− EMIR (European Market Infrastructure Regulation) Objective: reduce counterparty risk, reduce operational risk by improving standardization, improved transparency, improved market integrity

− UCITS (Undertakings for Collective Investment in Transferable Securities) Objective: harmonize and strengthen the European investment industry, EU passport

− AIFMD (Alternative Investment Fund Managers Directive) Objective: regulate the licensing and distribution of AIFs; EU passport (limited to retail clients); prohibition to discriminate specific forms of AIF

− MAR / MAD (Market Abuse Regulation / Market Abuse Directive) Objective: guarantee the integrity of European financial markets and improve investor confidence; create a level playing field for economic efficiency as a condition for combating market abuse

− Prospectus Directive Objective: improve the quality of customer information; harmonize the rules on prospectus content

− SLD (Securities Law Directive) Objective: harmonize legal framework for intermediated securities; improved investor protection

− REMIT (Regulation on Energy Market Integrity and Transparency) Regulates: prohibits insider trading and market manipulation, communication of insider information


14 © 2013 KPMG Rechtsanwaltsgesellschaft mbH, Mitglied des KPMG-Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative ("KPMG

International"), einer juristischen Person schweizerischen Rechts, angeschlossen sind. All rights reserved. Der Name KPMG, das Logo und "cutting through complexity" sind eingetragene Markenzeichen von KPMG International Cooperative

MiFID II/MiFIR – What is it all about? Impacts are far-reaching affect the entire value chain

Objectives/Core topics

Governance

Supervisory authorities

Market infrastructure

Market transparency

Investor protection 1

5

4

3

2 D

istr

ibut

ion

of s

ecur

ities

–

typi

cal d

istr

ibut

ion

cycl

e –

Distribution strategy

Product con- ceptualization

Product introduction

Organization of distribution

Advisory services

Sales efforts

Documen- tation

Execution of orders

After sales

Mat

urity

/Pro

duct

pr

oces

ses

and

sa

le b

y cl

ient

Trad

ing

and

mar

kets

–

typi

cal t

radi

ng c

ycle

–

Trading strategy

Trading operations

Settlement

Clearing

Data

Reporting

Manage- ment D

eliv

ery

or c

lose

-out

Execution of trade and confirmation

1

4

5

2

3

4

5


MiFID II Overview of regulation

MiFID Theme Topic MiFID II MiFID I Impacts

Market Structure

Organized Trading Facilities

- New category of trading venue designed to capture organised trading outside of RMs, MTFs and Sis

- Three trading platforms: Multilateral Trading Facilities (MTFs), Regulated Markets (RMs) and Systematic Internalisers (SIs). Threshold test in order to register as a Systematic Internaliser

- Impacts internal crossing systems operated by sell side brokers

- Pre-trade requirements applied to OTC volumes

- Ban on proprietary capital may impact the way in which sell side brokers achieve best execution

Automated Trading

- Continuous liquidity during the trading period

- Annual description of trading strategies to competent authorities

- New registration system and control requirements

- No specific requirements - Impacts execution strategies for

sell side brokers - Significant impact to High

Frequency trading (HFT) risk management

OTC Derivatives - Eligible OTC derivative contracts

to be traded ‘on-exchange’ - Clearing obligation in EMIR

- No specific requirements - Added costs arising from

execution on trading platforms and central clearing

- Potential reduction in flexibility when hedging positions

Commodity derivatives - Position reporting for all

commodity positions - Position limits to be enforced by

trading venues

- No specific requirements - Added cost for trading venues

and participants to enact - Restrictions in the positions that

participants may take could inhibit firms executing, inter alia, client orders

Central Clearing - Non-discriminatory access to

index and benchmark data - Non-discriminatory access to

CCPs

- Investment firms have the right of access to CCPs

- MTFs and RMs may enter into appropriate arrangements with CCPs and Settlement Systems in other territories

- Threat to those Exchanges operating vertical operating models

- Competition in clearing and derivatives should reduce costs, but potential for increased complexity

- Additional risk management challenges if dealing with multiple CCPs

Data Consolidation - New regime for data

consolidation and reporting, including Consolidated Tape, APAs and ARMs

- No specific requirements - Should improve data quality,

consistency and granularity - but, greater complexity and risk

of double reporting



Investor Protection

Investment Advice - Advisers have to state whether

their advice is independent or not.

- NA

- Where advice is independent, firms will need to consider a wide range of products and offerings available, at a potential cost to its own products/ offerings

Inducements - Ban on independent advisers

receiving/giving third party fees, commissions or other monetary benefits.

- NA

- Firms will need to carefully evaluate their remuneration and commission policies. Some face significant changes to business models

Execution Only - Meaning of ‘complex’ has been

redefined to include all products with embedded derivatives, and some Structured UCITS

- Execution only services can be offered for non-complex products traded on a Regulated Market or where they are UCITS compliant

- This may reduce the liquidity of some financial instruments - Firms will need to update their appropriateness tests

Best execution

- Firms to publish top five trading venues for executing orders - More granular reporting requirements for clients

- Trading venues to publish data relating to the quality of executions

- Firms required to achieve best execution for their clients

- Greater costs for trading venues and investment firms in achieving best execution, and reporting against it

Appropriateness - Need to account for the type and

complexity of financial instruments involved, and, in the case of advice, report how that advice meets the personal characteristics of the client

- Firms to assess whether financial instruments are appropriate for clients based on information received from them on their financial situation and investment objectives

- Impacts on policies and procedures




Transparency

Pre- and post-trade - Pre- and post-trade requirements

extended to non-equity instruments, also applies to OTFs

- Pre-trade requirements apply to shares traded on an SI, RM or MTF

- Extending pre-trade requirements to volumes that are currently OTC, and to non-equity, will require firms to adjust their risk management systems, as quotes extended to a client could be filled by others

Transaction reporting

- Details of persons responsible for the execution, including executing algorithms, to be submitted

- Details of end clients on whose behalf orders are executed

- Reports can be made by the Investment Firm, the Trading Platform, or an ARM

- Relevant details of executions in financial instruments to be reported to the competent authority

- Complexity in determining who reports the transactions - may require individual agreements if double reporting is to be avoided

- Added costs of updating systems to comply with added data fields

Position reporting - See commodity derivatives

above - No specific requirements - Overly prescriptive requirements

that may run counter to Comply or Explain

Governance

Organization Requirements

- More specific requirements for Investment Firms, RMs, SIs, Data Providers and Algorithmic Trading

- General requirements for Investment Firm and Market Operators, ensuring that adequate policies and controls are in place to ensure compliance

- Greater systems and controls and record keeping requirements will add cost and complexity to Firms

Authorization/ Registration

- All members of RMs and MTFs

need to be authorized - Tightening of the exemptions

regarding commodity traders

- Exemptions currently exist for non market-making proprietary traders who are not Sis, and also for those trading on own account in commodities or commodity derivatives

- A larger universe of market participants will be captured by MiFID, and will therefore need to ensure that they are authorized and compliant

Managing bodies - New requirements for Managing

Bodies of Firms and Market Operators, including quantitative requirements for the number of positions that a Board member may hold

- No specific requirements




Third Country Equivalence

- The Commission will rule whether the regulatory regime of a third country is equivalent to the EU’s -This will be required before


- May impose high barriers of entry into the EU for third country firms - Underestimating the scale of achieving equivalence arrangements uncertainty remains on practical implementation

Establishing a branch - Third-country firms wishing to

provide investment services to retail clients will be required to establish an authorised branch in the member state




FINMA position paper "Distribution rules / General Direction of Possible Regulations"

Insufficient investor protection

FINMA analysis of problems

Insufficient determination of

suitability and adequacy of financial products

Insufficient product documentation

Insufficient codes of conduct

Financial service companies are not

completely subject to regulatory supervision

International developments

Mandatory client segmentation (like

MiFID)

FINMA solutions

Standardized product documentation

(prospectus / product description)

Codes of conduct and organization rules (duty to disclose)

Extension of the supervision

(FINMA supervision for all asset managers)

Harmonization of international standards

(MiFID/AIFMD) Financial Services Act

• The legislative process is still in its infancy • However, international conditions are restricting Switzerland's reach drastically (e.g. MiFID II)


MiFID II vs. distribution report vs. hearing report

MiFID Theme Topic MiFID II Distribution report (FINMA) Hearing report (FDF) Market Structure

Organized Trading Facitlites

Not included. However, European counterparties will require that trades are cleared/settled at an exchange.

Not included. However, European counterparties will require that trades are cleared/settled at an exchange.

Automated Trading OTC Derivatives Commodity derivatives Central Clearing Data Consolidation

Investor Protection

Investment Advice Key point 5: Information on services General direction "conduct and organization" Inducements Decision of the Swiss Federal Supreme Court on

retrocessions General direction "conduct and organization"

Execution only Key point 10: Execution only (only for non-complex products)

Not included

Best execution Best-execution rules already exist Best-execution rules already exist Appropriateness Key point 1: Product information

Key point 3: Prospectus requirements (upon request) Key point 4: Information on own business and status Key point 7: Product description Key point 8: Knowledge & experience Key point 9: Suitability test

General direction "documentation of product characteristics" General direction "conduct and organization"

Transparency Pre- and post-trade transparency

Key point 2: Pre-trade information (product)

Key point 6: Transaction data (costs, risk, nature of offer)

General direction "documentation of product characteristics" General direction "conduct and organization"

Transaction reporting Key point 11: Scope and object of the service Not included

Position reporting Not included Not included Governance Organisation

Requirements Regulated in various FINMA circulars Regulated in various FINMA circulars

Authorization/ registration

Key point 12: external asset managers will be regulated Key point 13: investment advisors will be audited

General direction "change of group of supervised institutions" General direction "training for client relationship managers"

Managing bodies Not included Not included Third Equivalence Key point 14: equivalence of customer protection General direction "cross-border activities"


Holistic understanding of suitability

Can the service/product be offered?

No local clients are not eligible

Yes local regulation on suitability is applicable

Cross-Border

How can the service/product be offered? Information on clients Information provided to clients Knowledge and experience Financial circumstances of the

client Investment objective Risk awareness and risk

appetite

Client Suitability

Is the service/product suitable? Specific service/product-

related restrictions Adverse tax impact Requirements for

prospectuses Disclaimer

Product Suitability

Specific rules are applicable for each country

Client suitability depends on local regulations

Services/products must satisfy the requirements of the local regulations and must be approved and suitable

MiFID / FSA


Suitability - Example

Client from

Germany

at a Swiss bank

fund from

Luxembourg

is interested

in a

MiFID CISA/FSA UCITS/AIFMD

The client disposes of assets of CHF 2m Question: Is the client a "qualified investor"?

Suitability Which law is applicable? Pascal Sprenger, Director, Head of Legal Financial Services KPMG


Which law is applicable?

Bank

Funds

Client

3

2

1 4

CRM at the point of sale (POS): "What should I be on the look-out

for?"

This seemingly easy question does not have an easy answer!


Services provided to clients from the MiFID area

Can the service/product be offered?

No local clients are not eligible

Yes local regulation on suitability is applicable

Cross-Border

How can the service/product be offered? Information on clients Information provided to clients Knowledge and experience Financial circumstances of the

client Investment objective Risk awareness and risk

appetite

Client Suitability

Is the service/product suitable? Specific service/product-

related restrictions Adverse tax impact Requirements for

prospectuses Disclaimer

Product Suitability

Specific rules are applicable for each country

Client suitability depends on local regulations

Services/products must satisfy the requirements of the local regulations and must be approved and suitable

For the following examples it is assumed that the institution has the required licenses for each activity.


Swiss bank - Swiss client

Bank

Client

1

Background A (CH) banking client disposes

of a (CH) bank account.

The contract stipulates that CH law is applicable and that the place of jurisdiction is the bank's domicile.

Private law Contract contains clauses on place of jurisdiction

and applicable law, CH law is agreed upon Materially, the Swiss Code of Obligations

(specifically contractual law) is applicable. Contractual due diligence, information and

loyalty duties

Bank / account relationship

Account

1 Regulatory provisions Adherence to code of conduct (e.g. banking

secrecy, data protection) Professional and regulatory duties of due

diligence, information and loyalty find their origin in contractual law.

No substantial rules of conduct (in comparison to MiFID)

Pro memoria: CH procedural, penal, tax and anti-money laundering laws


Cross-border activity - Legal areas affected (categories)

Supervisory law Penal law Civil law Tax law

Anti-money laundering

law

Procedural law

As a rule, above-mentioned laws come into play for every jurisdiction (country) involved.

Regulatory requirements (e.g. MiFID)

Local penal codes

Contractual obligations / duty to be

diligent and loyal

Local tax codes

Local AML provisions

Norms relating to civil laws,

conflict of laws and procedural

laws (e.g. Lugano Treaty)

Administrative penalties

imposed by foreign

authorities

Criminal charges

Delivery / liability

Unfavorable investments / participation in

tax offense

Violations of local AML provisions

Undesired forums /

applicable law


Swiss bank - German client

Bank

Client

1

Background A (D) banking client disposes

of a (CH) bank account. The contract stipulates that

CH law is applicable and that the place of jurisdiction is the bank's domicile.

Civil law / procedural law Contract contains clauses on place of jurisdiction

and applicable law, CH law is agreed upon, however client cannot waive jurisdiction on consumer contracts (art. 15 Lugano Treaty)

Swiss banks' clients are usually considered as consumers (even if investing large amounts)

Bank must have commercial/professional activities in the consumer's home country or have some connection to that country.

Bank / account relationship

Account

1 Regulatory provisions If active in Germany, German regulatory law also

becomes applicable, apart from CH provisions (see above).

Being active in Germany requires an exemption / approval from BaFin.

Tax law The product/service must be compatible with

German tax law requirements (risk: unfavorable investment from a tax perspective and possibly, aiding and abetting a tax offense)

Pro memoria: Penal code and AML provisions (D + CH)

2

2


Penalization if providing service without relevant license (e.g. German banking act, KWG, in Germany)

§ 54 Kreditwesengesetz - Verbotene Geschäfte, Handeln ohne Erlaubnis (1) Wer

1. Geschäfte betreibt, die nach § 3, auch in Verbindung mit § 53b Abs. 3 Satz 1 oder 2, verboten sind, oder

2. ohne Erlaubnis nach § 32 Abs. 1 Satz 1 Bankgeschäfte betreibt oder Finanzdienstleistungen erbringt, wird

mit Freiheitsstrafe bis zu fünf Jahren oder mit Geldstrafe bestraft.

(1a) Ebenso wird bestraft, wer ohne Zulassung nach Artikel 14 Absatz 1 der Verordnung (EU) Nr. 648/2012 des

Europäischen Parlaments und des Rates vom 4. Juli 2012 über OTC-Derivate, zentrale Gegenparteien und

Transaktionsregister (ABl. L 201 vom 27.7.2012, S. 1) eine Clearingdienstleistung erbringt.

(2) Handelt der Täter fahrlässig, so ist die Strafe Freiheitsstrafe bis zu drei Jahren oder Geldstrafe.

.


Example: Fund Distribution (I)

Bank

Funds

Client

3

2

1 4

Background (CH) bank recommends that a

(D) client invest in a (LUX) fund

Fund distribution CH The scope of CISA includes the distribution of collective

investment schemes In Switzerland and from Switzerland (cf. art. 3 para. 1 in connection with art. 2 para. 1 lit. e CISA).

This means that Swiss distribution rules are being adhered to.

Fund distribution (D) As a rule, distribution activities in Germany are subject to the

laws applicable in Germany (e.g. UCITS Directive, AIFMD, German Code on Collective Investment Schemes, etc.)

Pro memoria: All other legal provisions mentioned earlier continue to be applicable.

Banking client / fund distribution 3


Example: Fund Distribution (II)

Bank

Funds

Client

3

2

1 4

Background (CH) bank recommends that a

(D) client invest in a (LUX) fund

Prospectus Product-specific requirements must also be taken into

consideration. Individual requirements may apply for each subfund / unit

classes, of which the PoS has to be aware of.

Supervisory law of fund domicile Other legal requirements may arise due to the applicability of

(supervisory) laws applicable in the fund's domicile.

Product requirements 4


Summary

Focus on Switzerland

Swiss civil law requirements form the base of the activity. Up to now, the PoS needed to heed relatively few legal requirements

(FSA?) 1

Focus on target country

As a rule, the civil code and regulatory provisions (e.g. MiFID) of each target country should be observed.

Example MiFID: analyze whether a product/service is suitable and adequate for a client

2

Distribution rules (funds)

In regards to collective investment schemes, there are also specific requirements which must be observed (high level of investor protection).

Foreign regulations must also be observed. 3

Product requirements

Product-specific provisions and requirements must be tested and adhered at the PoS.

4

• The various regulations cause increasing complexity at the PoS, which, in turn, could increase costs considerably.

Products and services must be regularly reviewed for their profitability.

What can I do today?



How are the current challenges being addressed?

Quelle: KPMG

The ongoing "transformation process" will continue to affect profitability.

The currently strong markets have a mitigative effect on individual banks but a downward trend would only worsen the situation even more.

A project's target is to deliver specific recommendations on how to shift the profitability curve back into the positive and increase its slope again once it has reached the low-point.

Separately adjusting prices or costs usually just causes a parallel shift of the profitability curve as the economy of scales approach (which will cause a positive shift) can only be attained with high degree of standardization.

For individual institutions, the existing complexity may be difficult to identify. This is why such areas should be outsourced.

Wherever possible, the economy of scales approach should be preferred (similar to today's settlement of securities)..

The presented transformation process is made up of different components: «Assets», «Product» and «Service».

How can costs be minimized?

Ertugrul Tuefekci, Director, KPMG


Review of the existing client base

Client base

Exit market 1

2

3

Cash only Market «to be analyzed»

Core market (full service)

Exit market Cash only Limitation of PF

Services & products

Core market (full service)

Qualitatives Assessment: • Client behavior (active, etc.) • # of transactions • Product categories (EQ, FI, fund, alternative) • Client type (mandate, advisory, EAM, etc.) • AuM

bgrsquared

Data mining

No business relationships Directives

Avoid regulatory costs

a) Avoid regulatory costs

b) Limitation of PFs

Complete implementation of regulatory requirements

Strategy

Scenarios

Decision

Quantitatives Assessment:

+ Optimization of income

- KPMG Compliance costs

Optimized services/products on offer =


Process on the example of suitability


Sample analysis: current portfolio (e.g. Germany)

AuM: Income (in millions) Regulatory requirements

Regulatory costs (in millions)

Net income (in millions) Activities

15 1 1 Cash accounts

7 3

MiFID*

2* 2.5 Shares

25 10 EMIR, AIFMD 1.5 8 Funds

2.5 0.5 non-standard / complex 1 -1 Structured products

62.5 15.5 4.5 11 Non-optimized total

13 1 0.5 Bonds

*e.g. MiFID conversion 1/4


Sample analysis: optimized PF (e.g. Germany)

AuM: Optimized income (in millions)

Regulatory requirements

Regulatory costs (in millions)

Net income (in millions) Optimized activity

15 1 1 Cash accounts

7 3.2

MiFID*

1.8* 2.6 Shares

25 10.5 EMIR, AIFMD 1.5 8.4 Funds

---- ---- non-standard / complex --- --- Structured products

60.5 15.8 3.3 12.5 Optimized total

62.5 15.5 4.5 11 Non-optimized total

13 1.1 0.5 Bonds

*e.g. MiFID conversion 1/3

62.5 +0.3 -1.2 +1.5 Optimization effect


Important aspects in the client analysis

As a rule, a bank should only be active in markets which either have a positive return or which are strategically relevant.

Costs will be kept down by achieving the necessary critical size in a particular market.

Therefore, it will be vital to the bank's success to implement the regulations which only bear low marginal costs in order to maintain the numerous off-shore markets also in the future.

In order to keep the costs of an additional country at a minimum, the requirements should be standardized.

Standardized requirements can then be automated.

As such, the compliance function should be industrialized in regard to suitability.

How can adherence be ensured?



4. Asset

3. Safe custody

A graphic presentation of new regulatory requirements A graphic presentation of regulatory requirements Workflows (I)

Capturing orders

2. BP / Client

1. Service

Cro

ss B

orde

r

Suita

bilit

y / T

ax

Cross-border test

Product suitability test

Regulatory Compliance

Module

Embedding the regulatory tests:

1. Service

3. Safe custody

2. BP / Client

4. Asset

Client suitability test


A graphic presentation of new regulatory requirements A graphic presentation of regulatory requirements Workflows (II)

Order (example 1):

Advice on the phone

Hans Muster, client domiciled in Switzerland

Cross-Border Test: PASSED

Buy recommendation UBS (N): Suitable Product

Active Advisory Container with risk profile "Dynamic“

Client Suitability Test: PASSED

Order (example 2):

Advice on the phone

Hans Muster, client domiciled in Germany

Cross-Border Test: FAILED

Order (example 3):

Advice on the phone

Hans Muster, client domiciled in Switzerland

Cross-Border Test: PASSED

Buy recommendation UBS (N)

Active Advisory Container with risk profile "Defensive“

Suitability Test: FAILED


A graphic presentation of new regulatory requirements Product Suitability – Tax view in detail


A graphic presentation of new regulatory requirements Example: graphic presentation of cross-border requirements

Cro

ss B

orde

r

Documentation of cross-border test

Regulatory Compliance

Module

Type of contact

… …

Service (z.B. advisory services)

Serv

ice

Client type

… …

Client's domicile

BP

/ Per

son

Digitised Cross Border Manuals for Banking

Michael Rombach, Engagement Manager, Appway

KPMG/Appway Digitised Cross Border Manuals for Banking KPMG Suitability Event November 2013

10 Years of Growth and Success Onboarding the digital future of the biggest brands in finance

180% GROWTH Double the speed of the industry average over the past 3 years.

4/5 WORLD LEADER 4 out of the top 5 Wealth Managers in the world choose Appway

2003 - 2010 2011

2012

2013

6 Locations GLOBAL PRESENCE Zurich HQ Geneva Hong Kong

Lugano New York Singapore

110k+ USERS Appway delivers unbeatable process experiences to people all over the world.

48

Digitised Cross Border Manuals Appway Cross Border Solution

49

Client Relationship Manager

Compliance

Cross Border Compliance

Send an Email

PDF

Safe as PDF Print out Save to DB

Cross Border Rules

Can the service be delivered

Log activity

Solution Demo

http://kpmg-suitability.appway.com/admin

The Avaloq Investment Suitability Framework Rafael Keller, Product Manager Internationalisation & Regulations, Avaloq Evolutions AG

The Avaloq Investment Suitability Framework KPMG Suitability Event, November 2013

Avaloq Evolution AG | Allmendstrasse 140 | 8027 Zurich | Switzerland T +41 58 316 10 10 | F +41 58 316 10 19 | www.avaloq.com

Rafael Keller , Product Manager Internationalisation & Regulations

Agenda

54

The Avaloq Investment Suitability Framework

System Demonstration

Agenda

55

The Avaloq Investment Suitability Framework

System Demonstration

Necessary Checks in a Suitability Framework

56

Area Service Country information Check

Client information Product/portfolio

Service to be offered to the client

Cross-border Is the bank allowed to offer a cross-border service?

Integrated country manuals

Domicile of the client Sales restrictions Inappropriate tax charges Additional risk information

Product suitability

Is the asset suitable for a client of a specific domicile?

Area

Knowledge and experience of the client per product class and per risk aspect

Product ratings based on product classes and risk aspects

Knowledge & Experience (K&E)

Has the client the K&E for the product?

Product risk classifications (e.g. 1-5)

Bearing of financial risks

Client product risk classification based on the client risk profile (e.g. 1-5)

Is the client able to bear the financial risks associated with the product?

Investment goals of the client

Loss capacity of the client

Expected return Loss capacity

(CVaR, stress scenarios)

Investment goals Is the portfolio risk (after trade) adequate for the client?

Is the portfolio in line with the client’s financial goals?

57

The Avaloq Suitability Framework

Avaloq solution

Integration of country manual (KPMG) GUI browser, process integration

Cross-border Is the bank allowed to offer a cross-border service?

Area

Integration of product suitability manual (KPMG) GUI browser, process integration Standard interface towards SIX/cleversoft

Product suitability

Is the asset suitable for a client of a specific domicile?

Facilitated rules management and Avaloq integration by the regulatory framework

Knowledge & Experience (K&E)

Has the client the K&E for the product?

Facilitated rules management and Avaloq integration by the regulatory framework

Standard adapter to Credit Suisse

Bearing of

financial risks

Is the client able to bear the financial risks associated with the product?

Check

Integration of Risk Engine for the calculation of stress scenarios and CVaR, VaR into module

Investment goals Is the portfolio risk (after trade) adequate for the client?

Is the portfolio in line with the client’s financial goals?

58

Application of the Avaloq Investment Suitability Framework

58

2 K&E 1 Product Suitability

4

1 2

3

3 Bearing of financial risks

4 Investment goals

1

3

59

Implementation and Management of Rules is Crucial for TCO

Business abstraction layer allows delivering generic rules for completely different parameterisations.

Customer only maps the standard business glossary to his specific Object Model and is completely compliant.

Customisation would still be possible but, even in such a case, a bank had a huge jump start for the implementation.

Industrialisation of Compliance Rules

External provider

Mapping on bank’s Object Model

Business Layer

Avaloq

Community External Consultant

Avaloq

Technical Layer

Business Rule Logic – Defined by Bank

Business Rules

Business Rule Glossary

Rule Glossary Implementation

Rule Engine Description

Rule Loader Table Model

Comparison of Solution Approaches

60

Challenge Avaloq Third-party tool

Documentation Integrated and fully reproducible audit trail for whole advisory process Integration in advisory protocols

Effort Effort

Automated pre-deal checks S&A testing Stress scenarios Product suitability Cross-border checks

Effort Effort

Risk simulation State-of-the-art simulations (stress scenarios, volatilities, VaR, CVaR…) Drill-down possibilities Mathematical documentation Consulting

Compliance rules Single point of truth for all compliance rules Central place for rule management Possibility to “purchase” standard rule tables

Integration Full Avaloq portal and multi-channel integration

Thank you for your attention.

Questions?

[email protected]

61

Why industrialize?



Why industrialize?

This allows the solution of a seemingly unsolvable problem!

1st line of defense 2nd line of defense 3rd line of defense

preventive (not at arm's

length)

detective (at arm's length)


preventive (at arm's length)



Exception Report

manual

automated

By introducing an independent preventive control at the front, it is possible to save significantly.


Why industrialize?

The targeted solution also harbors economies of scale as added costs for additional countries are reasonable and therefore the "fixed costs" can be allocated to more clients.

Non-compliant activities can be avoided.

The solutions specifically target the front office and are meant to support client relationship managers.

This then considers the idea that compliance should be an enabler not a "hindrance".

High-margin products can once more be distributed (expansion of positive lists).

Should it come to a legal suit, the proof is standardized evidence that all requirements have been adhered to.

Information on individual transactions are standardized which marginalizes the legal risk.


Why industrialize?

For the client, there is a true added value to a well-founded and comprehensive supervision of a client portfolio, and can therefore be developed into a new paid service. A subscribing client could for instance be informed of the following:

that a DTT has been terminated which could bring about tax consequences,

that a DTT has been amended so that there will be a negative after-tax effect,

that the client is holding a risk concentration (i.e. by changing values)

that the portfolio's risk no longer reflects the client's risk appetite,

that an amendment in a national law of the issuing state may have negative

consequences for the holder (e.g. FTT),

etc.

suitability event

Economy & Finance

kpmg agsa

kpmg regulatory requirements

kpmg ertugrul tuefekci

kpmg michel simantirakis

kpmg pascal sprenger

subsidiary of kpmg europe

tax payers

banking emir