The impact of the MiFID on active customer support

This was the reason for us to discuss the consequences and requirements in a group of experts. 14 compliance and MiFID responsible project managers from banks, business consultancies and law firms participated.

Topics of the discussion were, among others, cost reporting, suitability, grants and target market. Almost simultaneously to our discussion meeting, the Federal Ministry of Finance presented the draft report for a second Financial Market Reform Law. This draft is to lead to the implementation of MiFID II. As expected, the Ministry has essentially transferred the delegated legal act into the German law and thereby amends the Securities Trading Act and the relevant byelaws. Due to this, the draft does not contain much new information.

Here are the most important concretisations in our view in short:

Consultation Protocol

In the new article 55 section 11 WpHG, the renunciation of the previous advisory protocol is introduced. According to the requirements of the MiFID II, the draft law only requires a so-called “suitability declaration”. This is to name and elucidate the provided advice in terms of how the consultation was coordinated with the preferences, investment objectives and other characteristics of the customer. This would be nothing more than the documentation of the suitability test which was also required as a declaration of suitability until now. This would make possible clear facilitations with respect to the strict current standard which requires an individualized documentation of the consulting situation. This would benefit f.i. the so-called Robo Advisers since the explanation of suitability can be presented via automated systems. This would open the way for electronically generated consulting protocols on the basis of the customer’s data.

Commissions

After the long discussion about the justification of commissions by quality improvement for the customer, the branch network is also recognized as a quality improvement measure now. This clarification was added to the WpDVerOV. If the customer is given improved access to consultancy services, since the granting of a ramified regional branch network in rural areas ensures on-site availability of qualified consultants, it is a quality improvement that can justify commissions. For the institutes without a branch network the strict regulations for quality improvement, unfortunately, remain. In particular, the proposed article 60 of the Securities Trading Act contains the requirement that it has to be proven that the quality “of the respective service for the customer” will be improved. This is likely to complicate broad-brush justifications, instead, for the respective service it has to be documented for the customer which quality improvement is achieved by the commissions. In addition, in ongoing grants, that is, especially in the case of portfolio commissions, an annual information to the customer on the actual amount of the accepted or granted benefits has to be given.

Telephone recording

The draft also contains concretizations in terms of telephone recordings. The obligation is to be included in a new article 72 section 3 WpHG. The obligation to record telephone conversations exists in proprietary trading, that is, in the case of trading on one’s own account and for all services in relation to the acceptance, transmission and execution of customer orders. That goes very far. Recorded are to be, especially, those parts of the telephone conversation, in which risks, profit opportunities or the design of financial instruments or financial services are discussed.

On one hand, this specifies the delegated legal acts but, on the other hand, goes beyond those. In the delegated legal acts was just the talk of the obligation to record telephone calls “which can lead to an order placement”. According to the current proposal, almost all telephone calls in connection with securities trading have to be recorded.
 

Sales representatives and employees in the financial portfolio management

In a new article 76 WpHG, demands on sales representatives and employees in the financial portfolio management are arranged.

Sales representatives are those who inform customers about financial instruments, structured deposits and the company’s services. For them, expert knowledge requirements are set up in a new article 1a) of the WpHG Employee Notification Regulation. They have to master the legal basics as well as the professional foundations, just like the employees in the investment advisory, namely, for the financial products about which they provide information. In addition, the reliability of these employees has to be ensured as well.

The requirements for employees in financial portfolio management contain the same regulations. They must have the same expertise as the investment advisors, namely, for those financial instruments that are used in financial portfolio management. In addition, there are requirements concerning professional foundations in the fields of portfolio management and portfolio analysis. 

Moreover, a practical time of six months in the financial portfolio management with customer contact and practical exercise of the financial portfolio management has to be proven.

Product Governance

The requirements for product governance for the developers of financial instruments are recorded in a new article 11 WpDVerOV and for sales companies in a new article 12 WpDVerOV. Fortunately, the draft contains a clarification, according to which, the target markets only need to be created by the developers as far as financial instruments are “created, developed, issued or designed”.

Sales companies have to define target markets if such definitions cannot be obtained from the developers. However, the determination of a specific target market for each investment service (f.i. investment advice or management) is not necessary.

The product monitoring arrangements are to ensure that “the products and services are compatible with the needs, characteristics and objectives of the particular target market and that the sales strategy is consistent with the specific target market”.

The start point of the MiFID II is no longer too far away. The discussion showed, however, a partly, very heterogeneous view of the things that still have to be implemented by the banking and financial services sector. For this reason, we will discuss the current situation again in a few months.

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