MiFID II – costs and charges

Frank Potaczek – Head of Insight and Consulting (Investments)

MiFID II is starting to make waves within the UK Financial Services industry, as it has a profound impact on most areas of the UK financial services industry.

David Lawton, Director of Markets Policy and International of the FCA, said during their October MiFID II conference that the legislation has huge impact on the industry and thus is a major priority for the FCA, with the potential to change markets significantly and that the scale of the change is huge!

But what are the impacts for discretionary managers and what should advisers be looking out for?

Well, we’re still waiting on the details but we have a good idea of what’s in scope: corporate governance, product governance and investor protection.

As part of investor protection, we have an understanding the client communication will be key to this and disclosure and transparency plays a part. We expect that discretionary firms will produce much deeper disclosure of fees and charges as part of MiFID II implementation.

There is a requirement to disclose all costs and charges associated with a discretionary service – prior to onboarding of a client (so called “at the point of sale”) and on an annual basis. Although the legislation doesn’t mandate how the information is presented, it’s safe to assume that should be done in a way that clients understand e.g. pounds, shillings and pence or the portfolio amount before and after charges or some sort of reduction in yield figure.

Some may argue that argue that without mandated standards of costs and charges to be disclosed it may be difficult to compare like with like. However, it does seem that the regulator will be on the lookout for “best practice”.

So if there is an initial costs disclosure and then an ongoing costs disclosure, it would seem reasonable to make some initial assumptions on costs and charges for an onboarded client portfolio while the actual costs and charges incurred by that portfolio should be stated, at the anniversary date.

We look forward to seeing who is developing what.

Finally, you may have read that MiFDI II could be delayed however, it would be a brave gambler who bets against the retail facing legislation not being implemented on time.