Mifid II Report 2017: Austria
Markus Fellner and Magdalena Warum, Fellner Wratzfeld & Partners
SECTION 1: Market outlook
1.1 Please clarify which products or markets your jurisdiction hosts that are affected by Mifid II.
The implementation of Mifid II is the central reform project of European financial market regulation and has been omnipresent within Austria's entire market of investment services for several years. Since the new legal requirements under Mifid II affect the product portfolios of Austria's banks at different levels, namely investment service providers and manufacturers of investment products, the application of the directive's legal provisions, the correspondent regulation (Mifir), the regulatory technical standards (RTS) and the implementing technical standards all pose considerable challenges and require procedural as well as methodical adjustments; these will cause substantial extra effort and cost. For affected entities currently distributing securities, this will mean a review and adjustment of product conception and stricter and more diligent selection of the relevant product partners.
SECTION 2 (a) – EU member states: Implementation
2.1 Outline the possible key differences in (a) gold-plating; and (b) exercise of national discretion, where provided for in Mifid II in your jurisdiction
On January 3 2018, the Austrian Securities Supervision Act 2018 (Wertpapieraufsichtsgesetz 2018, WAG 2018) and the Austrian Stock Exchange Act 2018 (Börsegesetz 2018, BörseG 2018) will enter into force, implementing Mifid II in Austria. Furthermore, the implementation of Mifid II led to the revision of more than 40 acts of legislation. The banking industry and other sectors have acknowledged that the Austrian legislator has avoided national "gold-plating". This approach was considered to be the only way to maintain the efficiency of the security industry due to the already high level of regulatory density of European regulations.
2.2 What is the biggest concern in respect of these variations and possible types of divergences?
At the beginning of June 2017, the Austrian Council of Ministers adopted a resolution on the government bill for Mifid II implementation. Upon intervention from the banking industry, the Austrian legislator agreed to some significant modifications in respect of specific Austrian aspects within the review process. The following concerns, which the banking industry prioritised, have been successfully introduced into the review process:
The Austrian legislator decided to acknowledge local customer service facilities as quality improvement pursuant to Article 13 para 2 of the delegated directive (EU) 2017/593 (adopted in section 52 para 1, clause 1 lit d WAG 2018). Thus, for some credit institutions the existing distribution structure can be largely maintained in this context.
Even though the General Data Protection Regulation will not enter into force until May 2018, the Austrian legislator implemented a sustainable data protection system in relation to the communication and recordkeeping obligations pursuant to Mifid II, in the view of the credit industry. Section 113 WAG 2018 is supplemented such that data processing pursuant to Mifid II meets the conditions of the relevant articles of the General Data Protection Regulation.
(iii) In the explanatory remarks to section 31 WAG 2018, the legislator clarifies that only "active sales measures of the legal entity" fall under the definition of the terms "offer and recommend", and thus lead to product governance obligations. This is the case if, for instance, a consultant contacts a customer in order to arrange an appointment for a consultation and financial instruments are ordered in the course of this appointment. However, it is not an active sales measure if the customer himself demands a certain financial instrument, for example via online banking, by telephone or in person without the initiative of the legal entity. In the case of a mere 'passive distribution', there is no need to meet the product governance obligations.
2.3 What are the most important extraterritorial issues regarding Mifid II in your jurisdiction?
Since Austrian banks and other investment service providers are active internationally, the implementation of the legal provisions in respect of Mifid II in other jurisdictions is one of the most important extraterritorial issues. In this regard, the affected entities in Austria's securities market have to consider that there may be divergences in the application of Mifid II requirements in certain European jurisdictions, which makes it necessary to be all the more careful to remain in compliance with applicable law.
SECTION 3: Research
3.1 Please summarise the challenges Mifid II will pose in your jurisdiction with regards to research.
One of the major new requirements being introduced to mitigate conflicts of interest risks set out by Mifid II and Mifir is the provision that research should not be offered as an inducement. The relevant Article 13 of the delegated directive (EU) 2017/593 has been transposed in section 54 WAG 2018 providing – inter alia – that buyside investment firms are able to make the choice of paying for investment research as follows:
directly out of their own resources; or
should they choose, to pay using client commissions, using a research payment account supported by an agreement with the client, which codifies the total budget, how execution costs are split into execution costs and research costs and how commissions are to be shared amongst research providers.
Regardless of the payment mechanism described above, investment firms need to manage payments from clients, funds within clients and other research providers. Financial service providers will need to weigh which of the options is more optimal. While paying directly may minimise the operational impact of the new requirements, profit margins will be impacted unless management fees can be increased. On the other hand, if firms are seeking to recover costs using client commissions, there will be a need to introduce or enhance existing research payment accounts and commission sharing agreements.
3.2 Is pricing research compatible with market practices and existing legal frameworks?
The requirements regarding pricing research will have a greater operational impact and will require change to existing processes, since these are not compatible with current market practices and existing legal frameworks.
3.3 Is there clarity on how to resolve challenges in unbundling research and complying with Mifid II in this respect?
Despite the fact that the requirements with regard to research are being introduced in the Austrian Securities Supervision Act 2018, with its draft already being known since spring 2017, there is no clarity yet on how to resolve challenges in unbundling research and complying with Mifid II in these respects. However, the affected entities are intensely working on solving the challenges, especially in terms of costs, governance, control and the corresponding technology impacts.
SECTION 4: Trading/market structure
4.1 Which areas of trading / type of instruments will be most impacted by Mifid II in your jurisdiction and how might they be impacted?
In Austria, Mifid II effects nearly the entire financial market and credit industry. In order to introduce consistent and clear regulations for investment services, the legislator completely restructured the Austrian Stock Exchange Act (Börsegesetz 2018, BörseG 2018). Trading venues (including the new organised trading facility – OTF), as well as the new requirements for the increased supervision of commodity derivates, are now being regulated in BörseG 2018. Furthermore, the implementation of Mifid II led to the following amendments in BörseG 2018:
The regulatory gaps in the regulation of trading venues through extended requirements for existing trading platforms (multilateral trading facility – MTFs) were closed. In addition, a new permit obligation for previously unsupervised OTFs was established in order to improve the competition situation for regulated markets.
The access to funds for small and medium-sized enterprises (SMEs) was made easier by the establishment of SME growth markets.
The regulation of data reporting service providers should increase transparency on the markets.
The supervision of commodity derivatives by implementing position limits and position controls should lead to more stable financial markets.
4.2 What will be the key challenges with regards to transaction reporting and pre-trade transparency?
The key challenges with regards to transaction reporting and pre-trade transparency within the affected entities is to establish an adequate IT infrastructure in due time until the Mifid II requirements become applicable. Due to the fact that a major Q&A by the European Securities and Markets Authority (Esma) and other Level III measures were released at a very late stage, many questions and considerations by market participants remains open, making it very difficult for them to prepare and implement the new regulations.
For example, pursuant to section 48 para 2 WAG 2018, undertakings for collective investment in transferable securities (Ucits) and alternative investment fund key information documents (AIF-KIDs) qualify as adequate information in compliance with the pre-trade transparency requirements. However, Ucits-KIDs do not contain transaction costs applicable to a trade within Ucits. In this regard, Esma clarified that the information on costs not being mentioned in Ucits-KIDs needs to be disclosed separately to the investor. This potentially leads to complicated structured procedures until the time period in which packaged retail investment and insurance-based investment products (PRIIPs)-KID need also be drawn up for Ucits (December 31 2019). To summarise, many issues regarding transaction reporting and pre-trade are still unclear and will likely need to be adjusted after the Mifid II measures are already in force.
4.3 What are the main considerations that trading venues and exchanges will have to make?
Most of the larger market participants in Austria already have informed their customers that they will need a legal entity identifier (LEI) for security transactions as of January 2018. It is as yet still too early to predict if the relevant investors apply for the provision of such LEI within the given time.
According to a recent press release by the Vienna Stock Exchange, the new Mifid II regulations are very cost-intensive and burdensome. Furthermore, in the view of the Vienna Stock Exchange, stock exchanges will suffer the most from these additional regulations, as they do not lead to any functional improvement on the market.
SECTION 5: Investor protection
5.1 Explain the impact of heightened investor protection obligations in your jurisdiction.
Since benefits of third parties for financial advisors are strictly regulated and prohibited under certain circumstances, some market participants have had to review and revise their entire cost calculation and product portfolio. Moreover, the new product governance regulation under Mifid II regarding the defined target market forces distributors of financial products to make additional assessments in respect of certain customers, which causes extra administrative effort and cost. To comply with the new record-keeping obligations, market participants have had to scrutinise their business-relevant communications with customers. In some cases, financial services providers have even stopped customers from using certain communication channels for investment product transactions (for example order via telephone). Certainly, staff training will be necessary in the course of the implementation of the new investor protection rules.
5.2 Which area of focus within investor protection is of most concern/importance to your jurisdiction?
All areas of focus within investor protection (best execution, appropriateness etc) are considered to be of equal importance, since Austrian courts as well as the Austrian Financial Market Authority take a very strict approach on these issues. The Austrian financial industry is well advised to strictly act in compliance with the new investor protection regulations in order to avoid potential claims for damages from investors or administrative penalties imposed by the competent supervisory authorities.
SECTION 6: Outlook 2017
6.1 What are the overall risks or opportunities that Mifid II might bring to your market? Will Mifid II impact the competitiveness of your market?
The main concern about Mifid II is that the excessive regulation it causes will not serve its intended purpose. Instead of introducing more transparency and protection, the outcome could be the exact opposite, if established financial services providers decide to exit certain markets for strategic reasons in order to avoid the extensive costs and efforts of implementation.
6.2 What are the next steps – what should market participants be doing now to best prepare themselves?
The day on which the regulations become effective is rapidly approaching. In addition, implementation will be complicated by the combination of local implementing legislation and those regulations which are EU-harmonised and directly effective. As a result, market participants should as soon as possible ask themselves whether they are able to adapt their systems to comply with the new regulations. This may cause a complete policy change, massive investment and changes in proven work procedures. Furthermore, the affected entities should keep themselves updated about the latest developments and clarifications of the supervisory authorities.
About the author
Partner, Fellner Wratzfeld & Partners
T: +43 1 53770 0
F: +43 1 53770 70
As senior partner of the business law firm fwp, Markus Fellner specialises in corporate law, M&A, banking and finance law, restructuring and acquisition financing. Further focus areas of Fellner's include reorganisations and competition law. As a lecturer and an author of specialist publications on banking and finance, company law and insolvency law as well as restructuring, Fellner, with the support of his team, stands for exceptional quality, profound expertise and long-term experience.
About the author
Attorney at law, Fellner Wratzfeld & Partners
T: +43 1 53770 0
F: +43 1 53770 70
Magdalena Warum is an attorney-at-law at fwp specialised in banking and finance, dispute resolution, insolvency law and restructuring and company law. She is highly involved, among other things, in advising on investor litigation cases and has a focus on regulatory law.