MiFID II and the challenges of providing aggregated costs and charges statements
Steve Bailey of ATEB Consulting looks at the rules around aggregated costs and charges arising from MiFID II.
MiFID II came into effect on 3 January 2018 and placed several new and enhanced requirements on firms.
One of the key areas of change was the requirement for firms to provide ‘aggregated costs and charges’ statements to clients. The practicalities of this can be difficult, not least in getting all the data required, and ATEB made a deliberate choice to hold fire on issuing detailed guidance until we could get a better grasp of the practice and practicalities from various parties involved – providers, platforms etc.
However, as the first statements will need to cover the 12-month period to 3 January 2019 and will need to be issued before April 2019, we believe that it is now time to provide some guidance.
The FCA’s Conduct of Business handbook (specifically COBS 6.1ZA) sets out two mandatory Costs & Charges disclosure requirements for firms covered by MiFID II – Ex-Ante (done at outset, based on forecasts) and Ex-Post (done at least annually, based on actual costs for the previous period)
• Ex-Ante disclosure of aggregated expected costs for proposed investment services and financial instruments. This disclosure must be provided “in good time” before a client makes an investment decision;
• Ex-Post disclosure of aggregated costs which have actually been incurred for investment services and financial instruments, must be provided to each client with whom the firm has, or has had, an ongoing relationship during the year, annually on a personalised basis.
Information to be provided to clients
As a minimum, firms need to aggregate all costs and charges in connection with the investment service and all costs and charges associated with the financial instruments. Third party payments received by investment firms in connection with the investment service provided to a client must be itemised separately. The total of the aggregated costs and charges must be shown both as a cash amount and as a percentage.
This much is mandatory. However, firms must also provide an itemised breakdown of the aggregate costs and charges if a client requests it.
There is no prescribed format for disclosing aggregated costs and the FCA has stated that it does not intend to issue any guidance around format because the number of different business models makes this impractical. However, the Tax Incentivised Savings Association (TISA) has developed a sample ‘ex post costs and charges template’, setting out how both the mandatory and optional charges could be presented to the client – click here to download document. The complete TISA guide can be seen here.
In addition to stating the aggregated costs, firms must also provide an illustration showing the cumulative impact of costs on the investment return. The statement should also include a description of the illustration and any anticipated spikes or fluctuations. The cumulative impact is the actual realised net return compared to the return before deduction of charges – an example is set out in the template.
Timing of the statement
While the provision of an annual statement is the minimum requirement, you could choose to produce a quarterly Ex-Post statement if desired.
If issuing statements quarterly, we recommend that firms also issue one annually as it is possible there is a risk that, say, the totals on the quarterly statements may not match the actual annual amount.
When to provide EXISTING clients with the Ex-Post statement?
For clients who were already clients before January 2018, there are two reporting options:
• Use the calendar year for your reporting period – under this option, the first Ex-Post statements should cover the calculation period for the 12 months from 3 January 2018 to 2 January 2019. These Ex-Post statements must be sent out to the client by April 2019 at the latest.
• Use a different reporting period – some firms will prefer to align the reporting of costs and charges with the client’s annual reviews. Where an Ex-Post costs and charges hasn’t been provided during 2018, it is still possible to synchronise the reporting dates.
As an example, consider a client who usually receives their annual review in June but who did not receive an Ex-Post costs and charges statement in June 2018. You could:
• Produce a report which covers the period 3 January 2018 to 2 January 2019 and make sure that this is issued to the client before April 2019; and
• Inform the client that this annual report has been produced to meet new reporting requirements but that they will return to their normal reporting cycle in 2019 and that in June 2019 they will receive a report which covers the previous 12 months (i.e. June 2018 – May 2019).
When to provide new clients with the Ex-Post statement?
This depends on the Ex-Post 12-month calculation period you wish to use – let’s take an example using the same reporting period as above. Client invests on 1 February 2019 and you choose to follow a June to May Ex-Post statement cycle:
• The first Ex-Post statement will be generated from 1 February 2019 to 30 May 2019
• Subsequent Ex-post statements will be for the 12 months from 1 June 2019 to 30 May 2020
There is an option, where the calculation period is insignificant, to produce a first Ex-Post statement that covers more than a 12-month period. ‘Insignificant’ would be less than three months. For example, the client invests on 1 May 2019 and you follow a June to May Ex-Post statement cycle. In this case the first Ex-Post costs and charges statement could cover the period from 1 May 2019 to 30 May 2020. The report should be issued to the client within 3 months of the end date of the costs and charges statement.
What about clients who cease to be clients?
In this case, the client should be provided with a statement covering that part of the year during which they were a client.
Medium of disclosure
The new regulations make clear that statements can be issued in writing, by post, or via ‘a durable medium’. The FCA’s definition of ‘durable medium’ is “any instrument which enables the recipient to store information addressed personally to the recipient in a way accessible for future reference and for a period of time adequate for the purposes of the information and which allows the unchanged reproduction of the information stored”.
The instrument (e.g. website) used must be specifically chosen by the recipient when offered the choice between that instrument and paper.
There are undoubtedly real practical difficulties in producing aggregated costs statements for any clients other than those who have modest holdings invested via a single platform, and where the firm does not make any adviser charges to the client beyond those facilitated via the platform. In this case, it is likely that the platform will produce a statement that meets the requirements.
However, anything more complicated than this could well throw up real life problems including obtaining accurate and comprehensive charges data, choosing a format and reporting period, calculating the cumulative effect of charges on the client’s investment return and, not least, having the resource to prepare and issue accurate statements at the right time.
Nonetheless, the end of the first reporting period is approaching rapidly so firms do now need to identify the process they must put in place to prepare and issue statements to clients.
Below are some suggested action points:
Understand from the platforms you use how much of the costs and charges statement they are going to complete. All of it (i.e. product, service and third-party charges) or some of it (e.g. product charges only)? Or somewhere in between?
• Where you have clients who have investments ‘off platform’, what is the product provider going to provide in terms of costs and charges?
• Should you need to create a statement of your own advice charges, has the platform/provider developed an editable costs and charges statement whereby you can simply insert them to the template provided?
• If you must insert your own advice charges and potentially third-party payments into the statement, do you have a way of obtaining the exact advice charges that have been taken from each client’s investment for the period of the statement? For example, have you retained your advice charges statement the platform/provider?
• If not, have you a method for calculating the actual charges taken from each of your client’s investments for the period of the statement?
• Obtain copies of the costs and charges statements provided to your clients and compare it against the template we have provided – is there anything missing? What format is it in? Would it pass a clear, fair and not misleading test?
• Can the platform/provider handle the costs and charges period to which you are working? Some might only align to a calendar year reporting regime.
• Can the platform/provider handle Ex-Post costs and charges statements for new joiners and leavers ?
• Determine whether the costs and charges statements provided contain just the mandatory information. If only the mandatory information is included, is there a credible process and the ability for including optional information, if the client requests it?
• Understand which provider and platforms provide their costs and charges statement by a ‘durable medium’ other than paper and determine whether it meets the FCA’s tests as outline above.
• Where necessary, ensure that your clients have specifically chosen that method of receiving the costs and charges statement when offered the choice between that ‘durable medium’ and paper.
• Develop a plan for obtaining and distributing the Ex-Post costs and charges statements by April 2019.