With the adoption of FIDLEG, Swiss financial institutions will need to amend their advisory processes to comply with these new rule sets. This third blog post of our FIDLEG series explores 8 key design decisions financial institutions should consider when implementing FIDLEG. In particular, it showcases the impact of the new rules on the onboarding as well as offering and sales stages of the advisory value chain. By taking relevant design decisions early, financial services providers can significantly reduce the burden and increase the speed of implementation.
Early pro-activeness to prevent cumbersome reactions
Deloitte’s first FIDLEG blog focused on the regulatory requirements similar to its European counterparts MiFID II and PRIIPs while our second blog highlighted requirements going beyond respective MiFID II requirements (see our first and second blog post).
The focus of this third Deloitte FIDLEG blog is to map these new rules onto the advisory value chain and to highlight 8 key design decisions. These decisions affect the entire value chain, in particular the client onboarding as well as the offering and sales stages, and aim to facilitate a smart FIDLEG implementation. By making these key design decisions prior to the effective start of the implementation, an organisation can gain a head start and reduce the implementation burden while increasing its momentum.
Figure 1: Blog-relevant FIDLEG requirements and related strategic decisions along the advisory value chain. (Source: Deloitte 2018)
FIDLEG strategic design decisions in the onboarding stage:
1. Decide on a harmonised client classification approach for both MiFID II and FIDLEG (i.e. stricter opting out) vs. two co-existing approaches to client classification:
At the outset of every client relationship, the classification into retail, professional or institutional relationship has to be made. It drives information and conduct duties, indication of eligible products and has legal effects under civil law.
Distinctions between client classifications have been known to financial institutions since the advent of MiFID and are reflected in Swiss law, e.g. due to the Collective Investments Scheme Act (CISA). In comparison to MiFID II, the Swiss counterpart FIDLEG offers more flexibility for clients to opt-in/-out under given circumstances (see our first blog post).
2. Differentiate between Swiss/non-EEA clients and EEA-clients vs. applying same cost transparency procedures to entire client base:
The requirement to inform the client regarding services provided and associated risks can be fulfilled by an additional information brochure. In contrast, cost transparency requirements are deemed more complex to implement, especially if tactical, non-automated solutions were pursued for comparable MiFID II requirements. Such solutions might not be fully re-usable as cost transparency requirements under FIDLEG are less burdensome than under MiFID II. In particular:
- The scope under MiFID II is wider, i.e. in terms of in-scope products and services
- The level of detail to be disclosed under MiFID II is higher
The different cost transparency disclosures require financial services providers to decide on whether information duties under both regimes should follow the stricter requirements of MiFID II irrespective of the client.
FIDLEG key design decisions in the offering & sales stage:
3. Pursue a stricter “one size fits all”- approach regarding suitability/appropriateness checks vs. a differentiated approach to suitability (i.e. differentiating between Swiss/Non-EEA-clients and EEA-clients):
A point of contention under FIDLEG is the differentiation between advisory services related to individual transactions and transactions related to portfolio management. For the prior, FIDLEG only requires an appropriateness check while for the latter a full suitability check on portfolio level is required in addition:
The stricter suitability requirements under MiFID II require financial institutions to decide whether financial service providers should employ a “one size fits all” or a differentiated approach to ensure suitability and appropriateness as per FIDLEG and MiFID II requirements.
4. Assess relevance of inducements for service offering
An intensively discussed topic under MiFID II is the area of inducements. Even though the provisions of FIDLEG are less stringent (e.g. no quality enhancement must be evidenced), FIDLEG provisions are applicable to a broader product range, such as plain vanilla bond issuances. Under MiFID II on the other hand, the quality enhancement must be clearly demonstrable (see our first blog post). Although inducement requirements are less demanding under FIDLEG, financial institutions should evaluate their level of reliance on inducements as a source of revenue.
5. Collaborate with external service providers to produce BIBs (Basisinformationsblatt; or Key Information Documents (KIDs)) for own products and source them for third-party products vs. an in-house solution:
With FIDLEG, similar to PRIIPs, the advisor has to provide retail clients with information regarding complex products at the point of sale before their investment decision on individual products is taken. The resulting challenge is to obtain comprehensive and high quality data of own and third-party products in a timely and automated manner.
The requirement for producing BIBs inevitably increases complexity for financial services providers. As a result, financial services providers should take this opportunity to assess and re-consider their current arrangements for PRIIPs, utilising lessons learnt from past collaboration experiences under quality and cost considerations. In addition, sufficient lead time must be allowed to account for testing and enhancements to ensure readiness at day 1.
FIDLEG key design decisions across the entire advisory value chain:
6. Decide strategically on automation potentials throughout the value chain:
FIDLEG impacts the entire advisory value chain and has dependencies throughout all stages, creating significant additional efforts (e.g. providing an information sheet before selling a complex financial product to a retail client).
Benefits of an automated process include less manual work, enhanced security and compliance, improved traceability as well as simplified archiving and reporting procedures. Having implemented numerous tactical solutions for previous MiFID II requirements and having learned from experience, FIDLEG can be used as an opportunity to bundle long planned process improvements and user experience upgrades with desired and efficient automations.
7. Reassess product-shelf comprehensively and analyse profitability of products offered for each client segment:
As has been the case with MiFID II, FIDLEG requirements will lead to implementation cost and other ongoing costs for the sale of certain products to specific client classes. E.g., due to the obligation to provide BIBs for certain products such as structured products, the overhead cost of these products increases, resulting in potentially lower margins. In particular if limited consideration has been given as part of the MiFID II implementation, financial services providers should carefully evaluate their product-shelves to understand profitability of their products for each of their respective client segments.
During the evaluation it should be decided which products should be retained, determining the most suitable client segment, price and level of service.
8. Reassess optimal pricing structure – considering both, revenues and costs:
In essence, FIDLEG pursues the goal of creating a higher granularity and clarity regarding fees to facilitate the comparison amongst financial services providers and their products. As a result, in a world of increased cost transparency and comparability of fee structures, financial institutions should re-assess their optimal pricing structure considering both the cost and revenue components.
As an example, financial services providers could move towards a wider differentiated pricing model, offering standard and premium offers. Thus, providing a more sophisticated service to clients willing to pay a premium.
The Swiss FIDLEG regime has far-reaching impacts on the advisory value chain and financial services providers will meet many crossroads during implementation. An early FIDLEG impact analysis, including the definition of key design principles, will yield long-term advantages. Coupled with an assessment of internal initiatives and projects, it will uncover synergies for a joint design and implementation effort. Given the variety of aspects to consider, we believe that starting with this assessment prior to publication of the ordinance (FIDLEV) is key for success.
Stay tuned to read about how innovative technologies and digital capability solutions support the FIDLEG implementation in our upcoming blog posts and on our website.