Portfolio reporting obligations

The significant stock market falls in recent days, with the potential for further falls to come as the COVID-19 virus affects investor sentiment prompts us to remind firms of the reporting obligations that apply under MiFIDII.

COBS 16A.4.3 states:

“Investment firms providing the service of portfolio management shall inform the client where the overall value of the portfolio, as evaluated at the beginning of each reporting period, depreciates by 10% and thereafter at multiples of 10%, no later than the end of the business day in which the threshold is exceeded or, in a case where the threshold is exceeded on a non-business day, the close of the next business day.”

Who is responsible for reporting?

To answer that question, we need to establish the definition of portfolio management. Under MiFID (A4 and article 4.1(8)) it is defined as follows: 

“Portfolio management is managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more MiFID financial instruments. If there is only a single financial instrument in a portfolio, you may be carrying on portfolio management even if the rest of the portfolio consists of other types of assets, such as real estate. Portfolio management includes acting as a third party manager of the assets of a fund, where discretion has been delegated to the manager by the operator or manager of the fund. In the case of management of a collective investment undertaking, however, an exemption may be available to the operator (see Q43).
The advisory agent who keeps clients’ portfolios under review and provides advice to enable the client to make investment decisions (but does not exercise discretion to take investment decisions himself) is not carrying on portfolio management but may be providing other investment services such as investment advice under MiFID.”

Firms with reporting obligations also have to provided periodic progress reports to investors on a quarterly basis.

That should all be pretty clear and uncontentious. However, in the period immediately after MiFIDII came into force in January 2018, we became aware that some firms, in particular Discretionary Investment Managers (DIMs) that manage model portfolios on a platform took the view that the adviser firm would have the responsibility for at least the 10% element of reporting because they, as the DIM, had no contractual relationship with the client. The absence of a contractual relationship is technically correct  where the DIM service is provided on an agent as client basis. However, we did not believe that to result in the adviser having reporting responsibility. We sought clarification from the FCA. The situation is as follows.

  • The firm providing the portfolio management service is responsible for doing the reporting, which is both logical and consistent with what happened pre-MiFIDII;
  • If the firm knows that someone else is doing the reporting, then the firm does not need to do the reporting*;
  • If the firm provides online access to the required information that would otherwise be in a report AND has the ability to identify that the client has accessed that information during the relevant quarter, then the reporting requirement is satisfied.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

We have some sympathy with a DIM that is merely running a model portfolio on a platform as they may have no contractual link with the investor, where the service is provided on an agent as client basis. That is primarily what drove claims that the platform or indeed the adviser carries the responsibility for reporting.

Adviser firms that operate in-house model portfolios could feasibly be responsible for the reporting, but see * above.

However, while there might be a debate between platforms and DIMs as to where the reporting responsibility lies, one thing is clear … except in a very few cases, reporting obligation does NOT lie with the adviser firm. That much is clear from the definition of portfolio management summarised above.

“The advisory agent who keeps clients’ portfolios under review and provides advice to enable the client to make investment decisions (but does not exercise discretion to take investment decisions himself) is not carrying on portfolio management …”

Action Required By You

  • Primarily for information;
  • Make sure that reporting obligation has been accepted by the appropriate firm;
  • Consider what, if any, contact you should make with clients to offer comment or reassurance about the markets, or simply to advise that they might receive 10% drop reports;
  • Contact your usual ATEB Consultant for further assistance or contact ATEB here.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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