MIFID 2 and Brexit Where are we now, and a look into the crystal ball October 2017

Unbundling research: What’s the way forward? Pros and cons of your payment options RPA – ‘transactional’ method RPA – ‘accounting method Pay out of own P&L Views from the market 70% of Asset Managers say they’ll pay for research themselves(1) Is the market prepared for MiFID II? Battle over research costs Implications on coverage / number of providers Economic and fixed income research – free lunch? Challenge to viability of some business models Source: (1) FTfm as at 1/9/17

What will MIFID 2 mean for distribution? A reshaped market landscape… Sub-scale firms exit and sub-par firms close Shift to outsourced investment / PM Platforms increasingly prevalent …and a reality check for the industry.

Lessons from RDR: What might come next? Lower costs, more transparency Better advice A new advice gap? Inducements rules Need for more market research, and better understanding of the customer Vertical integration Pricing model innovation

What could the world look like on 2 October 2019? Here’s what might happen to research & execution a year on from MiFID II coming into force: Decrease in buy-side research spend Number of bulge brackets pull out of equity research Less sell-side coverage, shift to issuer paying for research Big asset managers build multiple internal research desks

What could the world look like on 2 October 2019? Here’s what might happen to distribution a year on from MiFID II coming into force: Regulatory fragmentation already happening, with more on the way Fee transparency drives fees lower: The sell-side slims in response Investment outsourcing becomes more prevalent More direct portfolios and bigger research teams Consolidation with both vertical and horizontal integration

Brexit: what happens next?

Firms leaving UK could reshape capital markets Movers and stayers 19 banks and 7 large asset managers have announced plans to beef up operations elsewhere in the EU Frankfurt, Luxembourg and Dublin early winners in the battle for movers Capital markets, liquidity and trading venues all impacted, at same time as MII disrupts market structure Asset manager’s front office operations have to adapt Movers could reshape investment landscape Regulatory impact will also hit stayers Contract law, employment law, tax law issues GDPR: Extraterritoriality issues

Passporting – no easy answers No common approach to equivalence Equivalence ≠ Passporting Could be (or feel) a long time between Brexit and equivalence Diversity of third-country provisions complicate things The biggest risk is temporal Equivalence is not a point in time consideration Judgement made for each new legislation Judgement subject to review at any time Policy to retail cross-border IM services likely to be more restrictive … … this state of affairs could well be permanent … but only if UK is adjudged as equivalent … and even then firms could face restrictions Impact on IM services to EU retail clients may be fatal Impact on IM services to EU professional clients could be limited

Delegation: Care needed ESMA focused on avoiding regulatory arbitrage Changing interpretations of ‘substance’ ‘Letterboxing’ will be more scrutinised Future regulatory reviews may cause more change Firms need to make contingency plans and communicate Impact of the various 3rd party provisions Impact of client / counterparty restrictions Optionality offered by operating model

Restricted freedom of movement: Complex, costly Raises questions around talent management … A EU existing talent B UK existing talent C Future EU & global talent … and loss of talent impacts economy plc 25% Of UK business will be negatively impacted by restrictions on EU migration(2) Need to invest more in training Source: (1) KPMG survey of 2000 EU nationals; (2) NIESR/CIPD.

What could the world look on 2 October 2020? Equivalence agreed UK regulation deemed not equivalent Existing delegation rules maintained No passporting Limited passporting Much stricter rules on delegation for UK, US, Asian managers Shift of portfolio managers to EU or: Give up on Europe as a market

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