It is arguably fund groups, platforms and discretionary fund managers who have the most work to do in complying with Mifid II, but the regulations still mean a number of changes for advisers which advice firms will need to understand.
When it comes to costs and charges disclosure, Mifid II will at the very least include changes to client agreements and disclosure documents. And that’s before what’s coming under the General Data Protection Regulation, but that’s another story.
As advisers get to grips with understanding and implementing Mifid II, Tisa has been running an industry-wide project to provide guidance around the regulations with its 170-plus member firms, which includes Nucleus.
The Tisa working group has published an industry guide to costs and charges, as well as other best practice documents. It has been drafted to help investment firms prepare to implement the Mifid II charges rules, which come into effect on 3 January 2018.
The guide is based on a raft of documents including the Mifid II directive itself and an investor protection Q&A document issued by European regulator the European Securities and Markets Authority. It is intended to provide an industry-wide approach to how to implement the charges disclosure rules in practice.
Under Mifid II, you will need to provide your client with an annual statement of the total costs and charges incurred in the previous year, specific to them with their total costs expressed as both a cash amount and a percentage.
There is also a requirement to aggregate costs and charges together, bringing together service costs for advice, third party discretionary management and ‘financial instrument costs’ of funds, platforms, products.
It is anticipated fund group and platforms will provide the required point-of sale and ongoing charges figures, hence Tisa’s project on an industry standard. Together with the advice charge being detailed in pounds and pence, this means clients will see the whole value chain in monetary terms for each component.
Another key area to understand is reporting obligations. Investment firms have to provide clients with a periodic statement of portfolio management activities carried out for that client unless such a statement is provided by another person.
The statement should provide a fair and balanced review of the activities carried out and of the portfolio’s performance during the reporting period. This should also include the portfolio valuation, details of each financial instrument held, and the cash balance at the beginning and at the end of the reporting period.
The total amount of fees and charges incurred during the reporting period has to be broken down to include total management fees and total costs associated with execution. A more detailed breakdown has to be provided on request of the client.
Performance comparisons should also be given to the client, with the investment performance benchmark (if any) agreed between the investment firm and the client, together with the total amount of dividends, interest and other payments received during the period.
The periodic statement should be issued once every three months, except in the following cases:
- where the investment firm provides clients with access to an online system where up-to-date valuations of the client’s portfolio can be accessed and the firm has evidence the client has accessed a valuation at least once during the relevant quarter.
- in cases where the above applies, the periodic statement must be provided at least once every 12 months.
- where the agreement between an investment firm and a client for a portfolio management service relates to a leveraged portfolio, the periodic statement must be provided at least once a month.