Along with many other ‘innovations’, MiFIDII introduced the requirement for firms to provide ‘aggregated costs and charges’ statements to clients. Regular readers will recall that we wrote about this back in December. See that article here.
The practicalities around aggregated costs disclosure can be difficult, not least in acquiring all the data required, and being confident that the data are accurate. As we have mentioned previously, ATEB made a deliberate choice to hold fire on issuing detailed guidance during 2018, until we could get a better grasp of the practice and practicalities from various parties involved – providers, platforms etc. Unfortunately, despite the imminence of the deadline date for first statements, the situation is not a great deal clearer, with every platform and provider apparently taking a different approach. However, as the first statements need to cover the 12-month period commencing 3 January 2018 and need to be issued before the end of March 2019, it is appropriate to provide some further guidance to firms.
The requirements – a reminder
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 of each new ‘product’, based on forecasts – the provider illustration will usually state what is necessary unless there are adviser or other costs that the provider is unaware of);
- Ex-Post (must be provided to each client with whom the firm has, or has had, an ongoing relationship with during the relevant period, done at least annually on a personalised basis of actual costs for the previous period).
If you have not already started providing ex-post costs disclosure to your ongoing active clients, you need to be aware that the deadline is the end of March 2019.
While there is time pressure for this first batch of statements, the real challenge lies in coming up with a single figure cost (in cash terms) and an average percentage over the period. Especially as there are likely to have been multiple changes within the portfolio, for example:
- flows in and out of the portfolio
- switches between funds
This means that, unless they know that a platform or other ‘provider’ is in a position to prepare and provide an accurate and comprehensive statement of ex-post costs AND has confirmed they will provide the statement, advisers have to keep track of events within the client’s portfolio – new money coming in; withdrawals; any income taken and any switches or other changes that have taken place. Advisers must look at an average of the assets that were in the portfolio over the period and use that to determine a single figure cost and an average percentage on the assets. This means that advisers need to be able to identify the average of assets in the portfolio over the reporting period (the first reporting period being the 12 month period starting 3 January 2018).
This could prove difficult for firms to do.
The situation is fairly straightforward where clients are invested in a single fund, or only and completely on a single platform where the platform operator has confirmed that they will be producing the necessary statements. Otherwise, and we believe this could apply in many cases, there will be added complexity owing to the presence of different funds within many clients’ portfolios with the consequent varying levels of charges for underlying funds within the portfolios. In such cases, advisers will need to keep track of the time-periods for which the different charges applied.
Costs and charges key issues
Interestingly, while there is not much currently in the way of clarity or consistency in the marketplace, the FCA recently published the findings of its review in relation to costs and charges disclosure and this has cast some helpful light on what is considered good practice.
In ATEB’s experience, compliance ultimately boils down to:
- the quality of available information;
- the resources available to the firm;
- the firm’s risk appetite.
This very much aligns with the FCA’s review findings. We explore each of these points below and overlay the FCA’s findings.
QUALITY OF AVAILABLE INFORMATION
ATEB has received many questions from firms struggling to obtain the data necessary for completion of the costs and charges statements. This echoes what the FCA found.
In the review, the FCA identified that transaction costs are not being fully reported and that asset management firms often report these as nil. The FCA has ‘ticked off’ offending firms and given a warning that further action may well be taken if the situation persists, particularly as this clearly affects the calculation of the mandatory ‘effect of charges’ section of the costs and charges statement.
It is important to state that it is possible to have no transaction charges in a fund. However, if there are indicators, for example, that a certain fund manufacturer has no transaction charges in any of their funds, this may warrant further investigation.
ATEB has had conversations about this aspect with many firms and we understand that, despite ‘best endeavours’, firms have not always succeeded in obtaining this information.
The good news is that, following the FCA review, it appears there will be some positive movement in this area. However, we would recommend that firms continue to be vigilant as we wonder if ‘best endeavours’ will be sufficient, or whether more robust actions may be needed.
The template identifies which items are mandatory and which are optional. The optional data, a breakdown of all costs and charges, must be provided to customers upon request.
The FCA expects firms to take reasonable steps to minimise the effort required for a client to request an itemised breakdown – then goes on to say that when disclosing costs and charges online, best practice would be to enable a client to get this information through hyperlinks. We would suggest that you check with any platforms you use to see whether the optional data is currently available via hyperlinks and, if not, identify how and when they are going to address this aspect.
For clients who receive a hard copy, the FCA expects firms to ‘take reasonable steps to minimise the effort required for a client to request an itemised breakdown’. The cleanest way of doing this is to simply include the optional information on the costs and charges statement. Another way would be making the client aware that this information is available and how they can access it. For example, in the absence of the above mentioned hyper links, by including contact details, perhaps an email address.
We have identified that different firms are taking different approaches to what is required in the optional costs breakdown statement. However, the most common approach we have seen aligns with the TISA guidance whereby costs are separated into four or five ‘buckets’ representing transaction costs, one-off costs, ongoing costs, ancillary costs and other costs. For example, under product costs and service costs (assuming there are no third-party payments received) each of these categories would be used to itemise the charges.
Non-MiFID costs and charges statements
Many firms have also asked whether pensions plan costs should be included in the costs and charges statements. The strict answer is no, the requirement only applies to MiFID instruments and that excludes pension plans. However, we take the view that it would be prudent to include pension plans in client statements. There are two reasons for this. The technical reason is that pension plans ultimately have financial instruments contained within them, which, of course, are captured by the MiFID costs disclosure requirements. The common sense reason is that many clients will wonder why they receive a statement detailing costs on some but not all of their investments. All things considered, we believe that it will be best to provide this information.
The FCA agrees and has acknowledged that providing costs and charges statements for non-MiFID products (e.g. pensions) giving clients a clear and consistent illustration across all financial products is ‘best practice’. However, they acknowledge that firms find it difficult to get this information. It will be interesting to see how the FCA proceed with this.
Meantime, as it might not be possible to disclose charges for non-MiFID products, for example pension plans, entirely in line with the rule requirements, it might be appropriate to present these charges in a section that is separate from the mandatory disclosures and include a brief explanation covering:
- why these are in a different format;
- that they are estimated and actual charges could vary.
Costs information on websites
The FCA review references the requirement to disclose certain mandatory information to clients ‘in good time’ before investing. If you have not done so already, we would recommend including disclosure documentation, which incorporates the firms costs and charges, on the firm’s website.
The FCA also found that some firms’ generic pre-sale disclosure figures (e.g. on a website or in disclosure documentation) differed significantly from their tailored point-of-sale disclosures, and that it was particularly the case when they had left out investment product transaction costs from pre-sale disclosures.
ATEB recommends that firms review all disclosure documentation to ensure consistency. It would also be good practice to regularly review a number of costs and charges statements with the pre-sale client disclosure documentation to ensure that they remain consistent on an ongoing basis.
Many firms will want to know what platforms are doing to help with the calculation of costs and charges? The Lang Cat has undertaken some research which outlines a number of elements including the scope of each platform’s ex-post report, how it’s being sent and when clients can expect it. The report can be accessed here.
Assessing this information will help you understand if you have any clients for whom you might need to produce a costs and charges statement and, if so, in what circumstances.
ATEB would also recommend that the costs and charges statements produced for clients are checked to ensure that they are compliant. It was interesting to note that the FCA found some non-compliant statements, “some firms still do not consistently include charges as both cash amounts and percentages”.
We will go into this more in the next section, but it is also important to understand the basis upon which the costs and charges are calculated as this could have an effect on the amount of money the statement indicates that you have charged the client – in order to ensure that you are comfortable with the calculation methodology?
FIRM’S RISK APPETITE
We know that firms are taking different approaches to the calculation of exact costs and charges required for ex-post statements.
The FCA review references the work that the TISA has done in relation to costs and charges and, while the FCA has not specifically endorsed the TISA guidance, it does seem to carry some weight, so it might be wise to follow the general approach suggested by the TISA which itself is based on a ‘consensus of industry good practice’.
We are aware that some firms have taken an average valuation over the course of a 12-month period, while others have opted to take the valuation point at the beginning or end of the period under review.
The TISA suggests using an average of month-end valuation points throughout the period.
It is important that firms identify how the costs for the investment actually apply as this is the basis that should be used to calculate service costs – e.g. ongoing advice charges – are they paid annually, quarterly, monthly …?
However, it’s important to point out that firms that have taken a different approach are not necessarily wrong. The most important thing is to document why certain decisions around calculations have been taken, so you can easily explain the rationale if the FCA takes issue at a later point.