Client reporting under PRIIPs and MiFID II - For Advisers

By Kaavya Dijendranath

Updated on Wednesday, 4 October, 2017

Written by Mikkel Bates, Regulatory Consultant at FE. First published at professionalparaplanner.co.uk.

With two months until the live date for PRIIPs and MiFID II,  how ready are you for the new client reporting requirements?  Do you know what information you need to provide, how and when you need to issue it and how you are going to collect the data needed?

PRIIPs

The application of the PRIIPs Regulation is relatively straightforward for advisers, because it is basically an extension of the existing need to provide a Key Investor Information Document (KIID) to clients before they invest in a UCITS fund.  PRIIPs (Packaged Retail and Insurance-based Investment Products) are pretty much all packaged investment products and you will need to provide all retail clients with a prescribed pre-sale Key Information Document (KID).

There are several things you need to bear in mind about PRIIPs and their KIDs:

  • A wide range of products and funds are in scope of PRIIPs, while pensions are out of scope. Insurance bonds, investment funds, structured products, investment trusts, VCTs, With Profits funds and derivatives are all PRIIPs.  While many investments held in an ISA are PRIIPs, the ISA itself is not.  There is no definitive list of what’s in scope, so if you are in any doubt, check the provider’s website, where they need to publish their KIDs.
  • Both products and funds are PRIIPs. A client investing in a fund through a bond needs to receive either a single KID covering both or a separate document for each.  Products offering a choice of funds (known as Multi Option Products, or MOPs) are likely to issue separate documents for the product and each underlying fund.
  • UCITS funds are PRIIPs, but, because they already issue KIIDs, they will continue to do so until January 2020, after which they will issue KIDs instead.
  • PRIIPs KIDs look similar to UCITS KIIDs, but are 3 pages long, with extra information and forward-looking projections of risk, returns and costs.
  • KIDs must be provided “in good time” before a sale. Exactly what this means depends on both the PRIIP and the client, but it must allow enough time for the client to consider all the features and risks.  They need to be provided before a contract is issued or amended, not with a cooling-off or cancellation notice.

MiFID II

MiFID II is much broader in scope than PRIIPs, because it affects your dealings with all clients, not just retail, and applies from before a client first deals until after they cease to be a client.

Whereas PRIIPs is all about disclosing the risks, costs and possible returns of investment products, MiFID II is about almost everything else, from transparency of trading venues, recording client conversations and how fund groups pay for research to product governance, providing client valuations and disclosing all costs (including product costs, platform charges and adviser charges).

I will focus here on what information you need to give clients at every stage of the journey.

Pre-sale

  • Fund groups need to determine the target market for whom their funds are appropriate. Advisers need to build on that to decide which funds are right for particular clients and in what circumstances.  After giving advice, whether or not it leads to a sale, advisers need to issue a suitability report to the client to explain their advice and the reasons for it.
  • As well as presenting potential clients with UCITS KIIDs and/or PRIIPs KIDs, you need to provide a costs and charges projection, showing aggregated product and service costs. This can be based on a standard investment amount and need not be client-specific.  It needs to show any anticipated spikes and fluctuations in costs and the effects of the costs on the investment returns.
  • A more detailed report must be made available on request from the client. This needs to go into the same level of detail as the costs on a PRIIPs KID and similar detail for the service costs.

You need to provide these reports before any sale from 3 January 2018. 

Fortunately, a European Working Group, made up of trade bodies and fund groups across Europe, is working on a standardised European MiFID Template (EMT) to deliver the product costs and target market data you need.  You then need to add your own costs and those of any platform(s).

Post-sale

  • Every quarter, unless you can show that they have checked their valuation online during the quarter, you need to send all clients a valuation statement.
  • Every year, you will need to send a report similar to the pre-sale costs and charges projection, except this needs to show the actual costs incurred over the previous year by each individual client. This is to be sent out to anyone with whom the firm has, or has had during the last year, a client relationship and you need to check that there are no significant differences between this and the pre-sale projection.
  • If you provide a portfolio management service for clients, you also need to monitor the value of their portfolios daily and inform clients if the value has fallen by 10% since the latest scheduled valuation. They need to be informed before the end of the same business day and this process is repeated for every 10% fall.

Because MiFID II comes in at the start of next year, the post-sale reporting needs to refer to the relevant periods starting after then, so the first annual costs and charges reports won’t be sent out until early 2019.  But the information must be collected from January 2018.

The EMT provides the raw product costs you need for the post-sale reports, but you need to make adjustments to report on the costs that have been incurred by each client, based on how long they have held an investment and any activity on their account.  Both the pre-sale and post-sale costs and charges reports need to show both monetary amounts and percentages.

Target market feedback

The final piece in this jigsaw is reporting back to fund groups if you have sold funds to clients who are outside the designated target market.  What information you need to feed back up the chain is yet to be agreed, but it is likely to be an exceptions report and you need to do this at least annually.

Fund groups need to include this feedback in their ongoing product governance process, but the practical difficulties were compounded by the European regulator, ESMA, in July, with its pragmatic approach.  It confirmed that using an apparently inappropriate (e.g. too risky) instrument in a diversified portfolio or for hedging purposes could make it appropriate after all.  This is something the industry has been saying for a long time, but it will be almost impossible to show when funds have been used like that on the feedback report.

There are exceptions or qualifications for almost every requirement shown here, but these are the core client reports advisers will need to provide from the start of next year.

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