We have been awash recently with articles on MiFID II, covering both the details of and opinions on industry readiness.
Indications are many firms, advisers among them, were not completely prepared for the changes. Those I have spoken to are somewhat confused about what exactly they have to implement but ‘think’ they are OK. Interestingly, many advisers are simply assuming their platform takes care of everything.
So if that’s the case, what are the kind of questions an adviser should be asking their platform on MiFID II? Here are some suggestions:
How are you supporting my disclosure requirements?
Under MiFID II there is a requirement to ensure all costs to the client are fully disclosed. This includes platform fees, adviser charges, product charges and the costs of any investments. If model portfolios managed by a discretionary fund manager (DFM) are being used, then these fees also need to be disclosed. Where investments are bought through a platform, then an aggregated disclosure of all charges relating to the investment service is needed. This should be quoted in pounds and pence and as a percentage, and should be made available both ahead of any product sale and an ongoing basis. A full breakdown should also be made available on request.
It’s likely the way in which providers display these costs (particularly for ongoing charges) will vary as there is no prescribed format. It would be worthwhile asking your platform how these will be calculated and displayed. In particular, if model portfolios provided by DFMs are used and trading charges apply, then how these are shown pre and post-sale is an area to explore.
There is definitely a view in the market that over time there will be further guidance on this and that illustrations, for example, will become more standardised.
Do I need a legal entity identifier?
This continues to be a grey area, with some platforms requiring advisers to hold a legal entity identifier (LEI) and some not.
The new rules mean charities, companies, non-SIPP pensions and trusts (except bare trusts) will need an LEI. In addition, any organisation which buys or sells exchange-traded instruments also needs an LEI. These include exchange-traded funds (ETFs), shares and investment trusts, as well as corporate bonds, gilts, venture capital trusts and structured products. While many advisers don’t trade in these type of investments, a number of platforms are simply asking every adviser to have an LEI in place. Though this might be unnecessary, it prevents the platform having to check that any trade in a reportable asset has been placed by an adviser with an LEI.
There has been some debate over who is actually ‘placing the trade’. If this takes place on a platform it could be argued it's the platform's responsibility to have the LEI in place. It's worth checking the requirements with your platform, and also ensuring that if you have any clients who are corporates, trusts or charities that they have an LEI.
The London Stock Exchange charges £115 plus VAT to register an LEI plus an ongoing annual charge. The Lang Cat principal Mark Polson sums it up nicely: "The best plan for an adviser is to get hold of an LEI and cover their backs. With so much ambiguity, it’s better to know that side of things is covered. For the price of a nice dinner out you get crucial peace of mind and it’s best to look at it like car insurance. You might not consider yourself capable of having an accident but you get the insurance anyway."
How will any 10 per cent drop in portfolio performance be reported?
This is an interesting one as the responsibility for reporting any drop in performance or ‘depreciation reporting’ should lie with the DFM. Under MiFID II, where a portfolio falls by 10 per cent or more during a quarterly reporting period then the client must be made aware of this by the end of the business day in which the fall occurs.
However where the assets are held in a platform model, the DFM typically has no access to client information. The adviser has taken responsibility for assessing the client’s risk profile and capacity for loss and for investing in an appropriately aligned model portfolio. The DFM has no knowledge of who the client is nor has any relationship with them.
Both DFM and adviser are therefore reliant on the platform technology to ensure the reporting obligations are fulfilled.
So it’s important advisers ask their platform how this will work in practice. Will the platform generate communication automatically for clients? If the platform provider helps to send client communications, will the adviser also be notified? How will the client be notified and will this be held in the client document store?
There is also a requirement to notify clients where there is a 10 per cent fall in the individual instrument if using leveraged financial instruments, geared ETFs or investment trusts. It would be advisable to consider how this can be tracked, identified on a platform and reported.
That's the platform side of things. But you may have one final question...
What happens if I don’t have everything in place yet?
MiFID II came into effect on 3 January. Anecdotal evidence suggests there are many advisers and platforms still finalising their processes and getting to grips with the requirements.
The FCA is adopting a ‘best endeavours’ approach to this, though that doesn’t mean anyone is off the hook. It's worth making sure you can evidence the effort you are making to comply and that you can provide an update on progress to date, perhaps through a MiFID II project plan or checklist.To download the Nucleus white paper MiFID II: A guide for financial advisers, prepared in partnership with Phil Young of Zero Support, click here