Costs and Charges for Clients after MiFID II
What will happen?
MiFID II brings in, from 3rd January 2018, enhanced requirements in relation to the disclosure to retail and professional clients and eligible counterparties of costs and charges information by investment advisers and managers and firms conducting execution-only business. These include;
- Upfront cost aggregation (which will require pre-estimates which must be regularly reviewed to ensure they are realistic), and
- Annual cost aggregation (i.e. reflecting all costs actually incurred)
For both of these, firms need to aggregate all costs and associated charges imposed by the firm for manufacturing and managing the financial instruments, and by any other firm to which the client has been directed. The total must be expressed as an annual monetary sum, and also as a percentage of the client’s investments.
Both the upfront and annual cost totals must be accompanied by an illustration of their cumulative impact on the client’s investment return.
In its recent Policy Statement covering this, the regulator clarified that “We do not propose standardised format for point-of-sale or post-sale disclosures, including costs and charges disclosures, at the current time”.
Specifically, the draft COBS rules and MiFID II Delegated Regulation state;
COBS 6.1.9 R A firm must provide a retail client with information on costs and associated charges including, if applicable:
(1) the total price to be paid by the client in connection with the designated investment or the designated investment business or ancillary services, including all related fees, commissions, charges and expenses, and all taxes payable via the firm or, if an exact price cannot be indicated, the basis for the calculation of the total price so that the client can verify it. The commissions charged by the firm must be itemised separately in every case;
COBS 6.1ZA.2.7 R COBS 2.2A.2R requires a firm to provide a client with information about all costs and related charges. That information must include:
(1) information relating to both investment services and ancillary services,
(2) where relevant, the cost of any investment advice,
(3) the cost of the financial instrument recommended or marketed to the client,
(4) information on how the client may pay, and
(5) details of any third party payments.
COBS 6.1ZA.2.8 R
(1) A firm must aggregate the information about costs and charges required by COBS 2.2A.2R and COBS 6.1ZA.2.7R, where those costs and charges are not caused by the occurrence of underlying market risk. This is to allow the client to understand the overall cost, and the cumulative effect on the return, of the investment.
(2) A firm must provide the client with an itemised breakdown of the costs and charges information required by (1) and COBS 6.1ZA.2.7R when requested by the client (see comments 1 and 2.)
(3) The information must, where applicable, be provided to the client on a regular basis, and at least annually, during the life of the investment (see comments 3 and 4.)
Comments from ESMA
1. ESMA suggests, in its Q&A, located here that “…… an investment firm take reasonable steps to minimise the effort for the client to submit such requests. When disclosing costs and charges in an online environment for instance, a best practice would be to enable the client to access such information through the use of hyperlinks. ESMA also considers it a best practice when an investment firm actively informs its clients on their right of submitting such a request when providing the aggregated information”
2. ESMA comments that “…..as one of the purposes of the cost disclosure regime is comparability of products and services, it is important that clients receive explicit figures for every item to be disclosed, even if it is zero. The firm should therefore not leave out a cost component which value is zero as this might lead to misinterpretations”.
3. ESMA comments that “firms can choose to provide this information more regularly, which could improve the clients’ insights in the costs and charges of the investment service (based on an ongoing relationship)…..If a firm chooses to provide the client with more frequent information, for instance on a quarterly basis, it should ensure the differences between the annual ex-post figures based on actual costs, and the quarterly cost figures are minimized. The firm could for instance do this by applying the same methodology when calculating the annual total costs and charges figures. Further, the firm should – where available – use realised and known ex-post cost figures”.
4. Concerning reporting periods, ESMA comments that “ESMA expects firms to provide such information on the basis of a time period that ends at the latest one year (12 months) after the date on which the ongoing relationship has started and that this information should be provided to clients as soon as possible after the above annual anniversary of the relevant service commencing. Where an existing ongoing relationship between a firm and a client ends during 2018, ESMA expects firms to provide information at that period end. Where part of the reporting period would fall under MiFID I and part under MiFID II regime, investment firms may choose to calculate, on a best effort basis, the costs and charges in line with MiFID II requirements for the entire reporting period or provide this first ex-post report with a breakdown of costs for the two periods and a clear explanation of the basis on which costs have been calculated”.
Where calculating costs and charges on an ex-ante basis, investment firms shall use actually incurred costs as a proxy for the expected costs and charges. Where actual costs are not available, the investment firm shall make reasonable estimations of these costs, provided that it identifies all expected transaction costs associated with the transaction, and that it clearly discloses to clients the basis on which transaction costs have been estimated. Investment firms shall review ex-ante assumptions based on the ex-post experience and shall make adjustment to these assumptions, where necessary.
Investment firms shall provide their clients with an illustration showing the cumulative effect of costs on return when providing investment services. Such an illustration shall be provided both on an ex-ante and ex-post basis. Investment firms shall ensure that the illustration meets the following requirements:
(a) the illustration shows the effect of the overall costs and charges on the return of the investment;
(b) the illustration shows any anticipated spikes or fluctuations in the costs; and
(c) the illustration is accompanied by a description of the illustration.
ESMA also reminds firms that;
The obligation to aggregate costs and charges is without prejudice to any other obligations to provide clients with cost information. For instance, for financial instruments that are within the scope of PRIIPs Regulation, a KID will be distributed to retail investors by investment firms that advise or sell a PRIP, thus providing information on ex-ante costs and charges per individual PRIIP.
How can Thistle help you?
Thistle will continue to keep this area under review and will issue further updates where necessary. For more information, email firstname.lastname@example.org or call 0207 436 0630.