Cost disclosure requirements under MiFID II explained

By Flora Glaister

Updated on Tuesday, 21 March, 2017

You will be hard-pressed to find someone working in the asset management industry today who is not aware, on some level, that the implementation date for the Markets in Financial Instruments Directive II (MiFID II) is less than a year away (3 January 2018). Despite the year long delay last October, time is truly of the essence as the European Parliament requires the directive to be transposed into national legislation by member states as soon as 3 July 2017.

The core objectives of the regulation are; to increase investor protection, to encourage competition in financial markets, to align the EU regulatory landscape and the introduction of supervisory powers. More specifically, this post will outline what firms need to do in order to comply with the rules around cost disclosure.

Article 24(4) of the directive requires firms that fall under the MiFID remit to provide potential clients ‘appropriate details of all costs and charges within good time’. This means that effective communication of costs and charges will have to be established across the distribution chain and while product manufacturers may not be directly subject to the rules, they may ultimately find themselves needing to take action.

Whilst most will be aware that the topic of cost disclosure is highlighted in the report, not all will be crystal clear as to the exact requirements, and how they should be presented. This, in part, is due to a lack of detail from the regulator. This post therefore sets out what firms will need to disclose in more detail, as suggested by the European Securities and Markets Authority (ESMA) as part of its Technical Advice report to the EC.

Point of sale (ex-ante) disclosure – “reasonable estimations”

The ESMA technical advice states that ‘full point of sale disclosure’ will be expected from firms relating to the cost of the investments as well as all ancillary services.

At point of sale, firms will also be required to provide clients with an illustration showing the cumulative effect of costs on returns which must be comprehensive of anticipated spikes or fluctuations (relating to upfront fees, exit costs etc).

Post sale periodic disclosure

Firms will be required to provide an annualised breakdown of costs accumulated where they have or have had a relationship with the client during the year. The guidance also states that where post-sale disclosure is provided on a regular basis it should also be provided on a personalised basis.

Identified costs to be disclosed

Both ex-ante and ex-post disclosure will require firms to show their client a total costs figure that incorporates both the service and product costs as a percentage and a value amount.

e.g.

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These figures will need to include the following costs, and if requested by the client, will need to be broken down into the relevant sub-sections.

Relating to the ‘service’

  • All one-off costs paid at the beginning or end of an investment service

  • All on-going charges paid to firms for their services

  • All costs relating to transaction performed by the firm or third parties

  • Any costs and charges that are included in ancillary services that are not included in the above

  • Incidental service costs

Relating to the ‘financial instrument’

  • All costs relating to the management of the financial instrument

  • All costs paid at the beginning or at the end of an investment

  • Costs associated with the acquisition or disposal of investments (broker commissions, exit charges paid by the fund, stamp duty etc)

  • Performance fees

Additionally, third party costs will need to be disclosed in the same way:

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 Implications for firms

Despite the lack of detailed rules or guidance on methodologies, especially in relation to assumptions used to calculate ex ante disclosures, it is essential that firms – whether distributors or product manufacturers – begin to plan for implementation of these requirements in order to meet the 3 Jan 2018 deadline.

Data may need to be collated from different systems and departments within the firm; arrangements will need to be made to receive necessary data from other firms involved in the supply chain and to pass information on to the next firm in the chain; an internal process for agreeing necessary assumptions needs to be established; and the format of the disclosures agreed upon.

To help in the exchange of MiFID cost and charges information from manufacturer to distributor, the European Working Group, who were successful in their previous construction of standardised exchange templates for solvency II (TPT), and PRIIPs (EPT), have again begun work on creating a single, Europe wide standard, for the transfer of MiFID II costs and charges and target market information.

FE welcomes the work of the various industry working groups and understands that to facilitate the exchange of data, the industry will need to come together to help provide full transparency of their costs and target market. With our core strength in data collection, FE are committed to expanding our efforts towards the collection of MiFID data. Acting as a centralised hub, we aim to help Asset Managers reach their various distribution channels, while providing distributors with the means to fulfil their obligations.

Timeline

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Please contact us today to discuss how we can help you work towards being MiFID II compliant.

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