Mifid Disclosure update – review published February 2019

FCA review of Mifid has found shortcomings.  

If you pay attention to IFAC audits, follow what IFAC say and implement changes IFAC recommend, you hardly need to worry about these missives from FCA.  IFAC have you covered! 

However, on a “need to know” basis of management…..”you need to know.”

So here is your two minute guide to the FCA Mifid Disclosure review.

FCA looked at the costs and charges disclosures of a sample of 50 firms in the retail investment sector.  They wanted to understand if firms were complying with the new rules.

FCA found firms fell short when disclosing third-party costs and charges.  That means not enough disclosure of underlying UCITS and DFM transaction costs – ie the costs of buying and selling.  For instance, while most OEICs will churn up to 100% of their book annually at, say ½ per cent bid offer spread for each stock, this adds the same ½ per cent to the annual management costs – but is rarely disclosed.  But you need to disclose it!

MiFID II came into effect on 3 January 2018. Since then, firms have had to change costs and charges disclosure in annual suitability reviews. See the IFA templates on the doc library - search“guide to mifid charges”.

 https://ifac.eu/pages/document-library.php

FCA looked at IFAs, DFMs,  direct-to-customer investment platforms and other investment managers (who don’t actively advise themselves).  They looked at websites (a particular favourite of theirs) and your communications to your clients in SRs and statements.  

As a reminder, firms must give clients information on all costs in good time before arranging the deal. 

This is the ‘ex-ante’ (before the event) disclosures.  And then again ‘ex-post’ (after the event) disclosures must be made annually.

As usual, there was confusion in the market and no consistent interpretation of the rules.  But it was clear that “most of them had given this serious consideration and were trying to comply with the rules.”

FCA found examples of good practice that they particularly liked 

• Some firms have provided training for staff and testing their staff's understanding of these rules – yippee to the BAT financial exam system!
• Firms that offered non-MiFID products (pensions and insurance bonds) were often applying the MiFID II disclosure standards to these products – Bravo to those leaders!
• Some firms had interactive sliding scale pop-ups and hyperlinks showing the impact of charges on investments over adjustable investment amounts and timescales on their websites.  Clever dicks! 

FCA focus in the near future is here:  

• Calculate and disclose ‘transaction costs’ of buying and selling shares, even inside portfolios.
• Generic advertising of low cost doesn’t make the grade.  Fine to advertise low cost, but not if it doesn’t match the final result, of “not-quite-so-low-cost-after-all-that-advice-you’ve-just-had”.   FCA told those firms to change their disclosures.  On a more granular level, this is probably just the difference between your client agreement and your letter of engagement.
• Some  IFAs still do not always include charges as both cash amounts and percentages.  How far behind they are – what have they been doing all this time? 
• Some firms told us that they were leaving out transaction and incidental costs and charges because they could not get the necessary data.  So they estimated the costs as zero.  FCA do not approve.

article written by charlie.palmer@ifac.eu