Just a few weeks into implementation, it is clear Mifid II will continue to challenge the industry for some time to come
The pursuit of greater transparency for consumers should of course be welcomed. However, the UK financial services sector was always going to encounter some unique challenges in trying to implement the new Mifid II regime, given its scope and complexity, with rules designed for the European Union market.Investment platforms, fund managers, advisers and other key parties all have responsibilities for implementing changes, which in many cases are inter-connected.
So what have been the stand out issues we have seen so far?
The product governance requirements apply to both Mifid and non-Mifid investment firms. They cover advised sales, non-advised sales and undertaking discretionary investment management. The rules also apply to distributors and manufacturers, albeit to differing degrees.
It appears the industry has struggled to understand the scope of products affected and how to approach the assessment needed to be carried out. This currently covers financial instruments – including funds – but when the Insurance Distribution Directive comes into force it will broaden to cover a wider range of insurance-based products.
Product governance assessments can look daunting at first but it is simply about examining the products and funds you are looking to recommend. Further simplification can be obtained by grouping these funds into different categories as part of the research process.
To comply with the product governance requirements, advisers need to consider which target market it is likely to be suitable for. Ensure the distribution meets that target market’s needs. Regularly reviewing products will help to ensure they remain consistent with the target market’s needs and, if necessary, will enable changes to be made to the distribution strategy if any problems are identified.
The key for advisers is to choose the appropriate distribution strategy so the client’s best interests are taken into account based on the product and its composition.
Aggregated costs and charges
Mifid requires firms to aggregate costs and charges information and disclose this to their clients, as the aim is to provide additional transparency. But it also imposes a range of obligations, including:
- Aggregated total costs and charges associated with the financial instrument (e.g. collective investment, shares, etc), investment services and any ancillary services.
- The disclosure needs to be given as a percentage and a cash amount.
- The information needs to be given pre-sale (ex-ante) and, where the firm has an ongoing relationship with the client, on a post-sale basis (ex-post). Furthermore, any ex-post disclosures must be given at least annually.The problem from the outset has been a lack of detailed practical guidance as to how to meet the new disclosures.
This has meant that firms have been left to derive their own solutions, with a number of different approaches emerging across the market.
Data gathering is required to perform the necessary calculations that feed into the disclosures. This involves input from various third parties, including platforms and fund managers, creating an industry-wide challenge.
Advisers should be giving clients an indication of the impact on their investment of the overall charges, but compiling all these different pieces of information in order to calculate such a figure is quite a challenge.
While some platforms have produced calculators, it only relates to them and it is based on their interpretation of the rules.
In addition, some fund managers have not been ready for Mifid and have not been in a position to provide the full charging information, which means advisers have been left unable to produce a clear and comprehensive best-fit calculation. The responsibility to disclose ultimately belongs to the advising firm.
Firms need a uniformed approach, which delivers a consistent, robust and repeatable process. Expect to see further support and new initiatives emerging to help.
Firms will also need to challenge and test the changes they have made to ensure they can withstand regulatory scrutiny further down the line, when the inevitable implementation reviews take place.
Mifid II has set the tone for the year ahead. It will soon be followed by more regulatory changes that will exert further pressure on advice firms to manage their risks, while remaining efficient and profitable. Another year of challenge and opportunity awaits.
Julie Sadler is managing director at Bankhall