We are a year on from the introduction of MiFID II, and that anniversary brings the first wave of what the European regulator snappily calls ‘Ex-post disclosure’. Even more information, and even more disclosures for your clients to understand – and in Latin to boot!
In fairness, what the regulation is trying to achieve is transparency of costs and charges – making sure that clients really understand what they’re paying for the service they’re receiving. And I don’t think any of us would argue that this is a laudable objective.
However, we all know that more transparency does not always equal simplicity (arguably, more likely the other way), and unfortunately, some of the complexity in the rules means that there is real risk of additional confusion.
So, what do the rules say?
Well – the actual rule covering ex-post disclosure is written as:
“The information about all costs and charges, including costs and charges in connection with the investment service and the financial instrument, which are not caused by the occurrence of underlying market risk, shall be aggregated to allow the client to understand the overall cost as well as the cumulative effect on return of the investment, and where the client so requests, an itemised breakdown shall be provided. Where applicable, such information shall be provided to the client on a regular basis, at least annually, during the life of the investment.”
This rule applies to all ‘MiFID II’ business – i.e. ISA, GIA (not SIPP or Bonds or Insured Products of any kind) and if you are a distributor under MiFID II (as we are) then the rule applies to you too.
Yes, but what does this actually mean?
In simple terms, it means that clients need to be told, at least once a year, exactly how much they’ve actually paid for the service they’re receiving and for the investments they hold, and the effect of those charges on their investment returns. Sounds simple? You’d hope so, but unfortunately – and perhaps unsurprisingly – it’s not. The disclosure needs to include every single charge, calculated to reflect the value of their investment on any given day, and added up to give a single number.
And this is where the complexity comes in. Because, as we all know, the value of your clients’ investment portfolios are ever changing. Withdrawals happen. Income is paid. Charges are deducted. Additional investments are made. And that’s before considering market volatility! Therefore, the way a platform deducts custody and/or advice charges (are they calculated daily or monthly), the value of the investment on any given day (the fund charges and implicit transactional charges will vary) will all impact the numbers given to the client.
In addition, the numbers for the charges need to be given in £s and pence, as well as a percentage. Conversely this isn’t the case for the cumulative effect of charges number – the distributor can choose how this is disclosed.
What is Parmenion doing?
We will be issuing a statement to all clients for each of their portfolios before the end of March to communicate this ex-post charges information. This means that your clients will receive it directly from us – either by post or online, depending on their preference. This also means, that if your adviser charges have been administered through Parmenion, that you can rely on our disclosure to fulfil your ex-post obligations for the clients you have on Parmenion.
Now, we do appreciate that many of your clients will have holdings elsewhere, and therefore may be subject to multiple communications from multiple providers on this subject – which isn’t ideal. And we also know that many of you would prefer to aggregate the costs and charges yourselves at your clients’ annual review points. So we’re looking at developing the capability for you to generate your own ex-post charges information between your own defined date ranges – more on this soon.
Making the complex simple
When designing and building this statement, we thought very carefully about whether clients would understand the information we were presenting. There is a lot of complexity involved – indeed, the volume of calculations we will undertake in the production will be north of four billion – and explaining how the numbers are made up in a way that is easy to understand isn’t simple.
Test and test again
This is why we purposely built some time into our project to ‘test’ the statement with investors. We learnt some interesting things. For example, that it was important to put the value of the portfolio on the statement, and that some of the terminology we had used wasn’t explained well enough.
We also decided that we wouldn’t disclose the cumulative effect of charges in a percentage form – just pounds and pence because it tested better with clients.
In addition, we are including all assets held on the platform – so pension assets too. We did this because clients won’t really distinguish between ‘MiFID II’ business and ‘non MiFID II’ business – they will care about their whole portfolio on Parmenion, and we believe that not including pensions business will create more questions than it answers.
What next?
We will start issuing the statements from the middle of February – an example template of our statement can be seen here. The delivery of them will be phased over a number of weeks so that we are able to manage any client queries better. The statement will be posted in the document library for you to access as soon as it has been generated.
If you need further information we have created a number of knowledgebase articles which you can access via the platform or you can call our client services team on 0117 204 7678.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.