Costs and charges under MiFID II iress.com
Costs and charges under MiFID II MiFID II will significantly change the way costs and charges are disclosed to investors, affecting all who provide investment services. So if you are a financial planner, wealth manager, asset manager, discretionary manager or stockbroker acting on behalf of retail investors, you will soon need to disclose all associated costs and charges. In this paper, we have laid out some key challenges of the directive, including some practical ways in which you can address the new requirements. We also highlight the areas where we believe MiFID II presents firms with new opportunities to strengthen client relationships. A summary of the requirements MiFID II Article 24.4; Delegated Regulation Article 50, Article 59.9 MiFID II requires participants to disclose all costs and charges related to the financial instrument and ancillary services, including the cost of advice, and where relevant, the cost of the financial instrument recommended or marketed to the client and how the client may pay for it, including any third-party payments. The information must be disclosed on both an ex-ante (forecast) and ex-post (actual costs incurred) basis. The client must be provided with an illustration showing the effect of the overall costs and charges on the return of investment. This must occur on a forecast and actual basis (the latter occurring regularly and at least annually during the life of the investment.) Key challenges 1. What is the timing of forecast and actual cost disclosures? 2. Where does the costs and charges data come from and when? 3. How can costs and charges be disclosed in a way that they are in context? 4. Who should produce the fee disclosure for the client? 5. How can a participant provide the necessary fee information efficiently? 2
1. The timing of forecast and actual cost disclosures Forecast costs will need to be disclosed from 3 January 2018 for all new MiFID investment sales, however, there remains debate around applicable dates for actual cost disclosure. The general consensus is that, as it is an annual requirement, the client should receive actual costs a year after their MiFID periodic valuation report i.e. starting January 2019. While this seems like a long time away, participants need to start recording the appropriate information for client accounts from January 2018. 2. Where does the cost and charges data come from and when? To complete the disclosures, data will need to be collated and aggregated from a number of parties including manufacturers, executing venues, investment participants and advisers. Having the data available when required will depend on how the data is sourced. The process of data collection should be automated using technology to ensure disclosures can be produced efficiently. The sources of cost data are: a) Market data that provides information from manufacturers b) Transactional data feeds that identify all the costs taken from the client account c) Remuneration management systems that identify all revenue received on behalf of clients 3. How can costs and charges be disclosed in a way that they are in context? The objective of MiFID II is to strengthen protection for investors and to improve market transparency. It is not designed to deter investing. It is therefore crucial that disclosure of costs and charges occur in the context of the value financial products and advice services provided. Where ongoing service to the client is provided, it will therefore be important to associate disclosure with the ongoing service levels provided specifically to the client, including items such as portfolio monitoring, digital access, meetings such as an annual review, regular reporting and newsletters covering the breadth of services provided. IRESS CAPABILITY: Agreed service levels tracked by XPLAN IRESS XPLAN wealth solution allows participants to specify the agreed service levels (benchmarks) for a client. These service benchmarks can then be monitored and tracked using tailored workflows and alerts to track and notify the advisers of service benchmark timing and key dates to ensure none are missed. The production of the cost and charges disclosure statement can be automatically produced by XPLAN, including the cost of the service and a summary of how the agreed service benchmarks have been met. 3
4. Who should produce the fee disclosure for the client? Another area of debate is who should produce the fee disclosure for the client. Ultimately, this will depend on which entities have (or want) the relationship with the client. For example, in a scenario where the client receives their valuation report directly from the investment firm(s) or platform provider(s), then the investment firm or platform provider should provide the disclosure. It may be tempting for participants to decide that another party in the value chain is picking up the production of the disclosure. However, a more strategic focus would be to take a view on what is the most suitable approach for nurturing long term client relationships. This is where lessons can be learned from the Australian experience and its implementation of the Future of Financial Advice (FOFA) regulation in 2011. FOFA also introduced the need to provide an annual fee disclosure statement and a requirement to detail the service promises to be provided by the advice participant (such as regular meetings, monitoring and reporting, newsletters). While this is not captured to the same extent by MiFID II, it does present an opportunity for participants to detail the value they deliver to clients over and above an investment return based on product or portfolio selection. 5. How can a participant provide the necessary fee information efficiently? Having established business processes and the service proposition i.e. you ve decided when, what and how to disclose, where is all the data going to come from? (a) Product manufacturer costs Product costs are and will be made available through electronic quantitative and qualitative market data providers. In addition, the European MiFID Template (EMT) is aiming to provide some consistency and standardisation in the delivery of data from manufacturers. Integrating these feeds into a business core systems will drive efficiencies and scalability within the production of both forecast and actual disclosure. IRESS CAPABILITY: Electronic market data feeds within XPLAN XPLAN includes standard integration to a number of market data providers. In addition, integration to other data providers is provided through standard interfaces making the coordination and aggregation of different market data sources much more efficient. Where a business has a non-standard arrangement with a manufacturer, it s important that a business technology can identify and differentiate these nonstandard feeds to ensure the correct costs and charges are accounted, recorded and reportable. 4
(b) Transactional costs Actual costs and charges will include all amounts that are deducted from an investment, for example switching costs and custodial fees. Businesses should ensure that software is capable of recording and reporting on these transactions to ensure accuracy and to automate the production of actual cost statements, thereby avoiding inefficient manual processes to meet reporting obligations to clients. The accuracy of transactional data against correct transaction types will ensure that it is represented correctly to the client but will also assist in the creation of other client reports and analysis such as CGT realised and unrealised gain and profitability, and return calculations. IRESS CAPABILITY: Transactional feed IRESS XPLAN allows recording of each transaction to enable the automation of reports, including cost and charges disclosure statements. The benefit of transactional data feeds, apart from the obvious operational time saving, is the accuracy of the information from the provider and the ability to provide the client with a detailed breakdown of all activity in relation to their investment. As this information comes directly from the provider, it will match the information that they receive on any direct statements and appropriately allows the business to provide each client a consolidated view across all platforms, providers and investments. For actual cost and charge disclosure, the executing venue or platform provider should provide data via a daily transactional data feed. This will provide accuracy at the client level of all capital transactions, costs and charges, and allows for a richer level of reporting by advisers to clients. 5
(c) Adviser and firm costs Where service fees are levied for advice or execution only services, participants must disclose this as part of the expected statement and actual cost statement. The expected statement should be based on the costs actually incurred as a proxy but can make reasonable estimations where these are not available. The actual statement however, needs to show the actual amounts charged. Services can be charged for in a number of ways, including Adviser Charge facilitated by the investment provider (where the provider takes the money from the investment and pays this to the advisory firm) and client direct fees (where the client pays the adviser directly). Where participants have implemented revenue reconciliation systems, they will be able to record an estimate of what the expected adviser charge is and reconcile this against the actual amount received upon receipt of the statement and money from the providers. Leveraging highly automated revenue management and reconciliation systems will be essential for participants to produce MiFID II disclosure statements accurately, efficiently and at scale. Enabling participants to demonstrate value to their clients and to remain competitive amongst their peers will be a differentiator for technology providers in this segment. IRESS capability: Revenue management and reconciliation system - CommPay IRESS revenue reconciliation system, CommPay, is used by many participants in the UK. It is available as a tightly integrated module of IRESS XPLAN solution. CommPay records the expected and actual adviser revenue received on behalf of a client. The actual cost data can be loaded from manual statements or through an electronic interface with providers. CommPay ensures accuracy and can deliver significant automation efficiencies. In Australia, the system has been used to handle Annual Fee Disclosure requirements under FOFA, and as such, its capability is directly applicable in the UK as it faces similar challenges within MiFID II. A key learning from Australia in the area of fees and charges was around a lack of clarity on exactly which fees should be included in the disclosure statement. A structure was provided by the regulator but the granularity of detail was not provided. To respond to this challenge, IRESS software was built to collate the information for presentation to clients based on the participants specific selections, enabling participants to have the flexibility to implement the regulation as they interpreted it. Businesses that use CommPay can select which items to include, or alternatively, they can select from a standardised document template. For reporting, the information from the revenue records and service benchmarks is collated, summed and presented without the adviser having to assess each individual revenue and service line. IRESS experience with FOFA provides us with unique and invaluable insight that will enable our clients to implement MiFID II costs and charges in an effective, efficient and client-focused manner. 6
MiFID II deadline - 3rd January 2018 For more information about anything you have read in this paper please contact us: enquiries@iress.co.uk or call 0345 068 1000 7
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