As we are sure you are all aware, January 3rd 2018 sees the introduction of MiFID II. Wealth managers and fund houses have a lot on their plate due the implementation of the various new regulatory obligations it comes with. James Goward, Head of Sales Support Rathbones, summarises what Rathbones will be doing to help guide clients through the transition.

Another bowlful of regulation

MiFID II is enough to make you hate spaghetti.

With its countless strands, spreading change all over the industry, it’s difficult to get a handle on it all.

Different firms are responding in different ways: whether it’s absorbing research costs (or not), how they set out fund costs and the way they will keep clients informed about their portfolios as required under the new rules.

In spite of this array of change, it’s best for advisers to keep their attention on what their clients should receive under MiFID II and whether their Discretionary Fund Manager’s (DFM’s) plans can deliver it. All DFMs should be aiming to prepare the same thing, it’s just the recipe they use that’s different.

Below are some of the requirements MiFID II demands by 3 January, and what Rathbones have cooked up to solve it:

Know your customer

On the forefront of MiFID II is a significant increase in the amount of client contact required. Investment firms are required to know more about their clients than ever before – or, be able to show they know more, at least. This extends to handing over more background information when trading on regulated stock markets. Agents for buyers and sellers will have to report who the trade is for, using a National Identifier as proof of identity (National Insurance number, tax ID number, passport number). The new rules mean charities, companies, non-SIPP pensions and trusts (except bare trusts) will need a Legal Entity Identifier (LEI) code in a bid to crack down on market abuse. These 20-digit codes will be an internationally recognised way to connect the activities of entities across different markets. The London Stock Exchange is charging £115 plus VAT to register an LEI.

At Rathbones, for virtually all their private clients they already hold most of this information already. But they will be reviewing the data and reaching out to clients to fill in any missing details. As for their trusts, companies and charities clients, they have written to those affected by the changes. It is up to each entity to arrange its own LEI, otherwise it will be barred from dealing on regulated exchanges. Rathbones are offering a free LEI registration service for their standard fee-only tariff clients. For clients on other tariffs, the service will be offered at a discounted rate of £50 plus VAT. New trusts and charities that they take on after 3 January will have an LEI client instruction form included in account opening paperwork.

More regular communication with clients

Quarterly valuations are now mandatory and clients must be notified within 24 hours of any 10% fall in their portfolio from the value stated in the last quarterly valuation. They should also be told for every subsequent 10% fall thereafter.

Rathbones have spent the past few months designing and streamlining a system to monitor all of their portfolios and automatically send an email (or letter if no email address is held) to the client the next business day. This system obviously has to take into account client withdrawals and contributions when doing the calculations. The Rathbones Online system has carried soft copies of all client reporting for some time, and this will continue to be the case. While clients cannot opt out of the increased reporting there will be an option to go paperless, using this system. They are not charging clients more for the increased reporting requirement, although the FCA hasn’t given any guidance on this. Some DFMs may find it necessary to charge more for the increased burden.

Price transparency for client suitability

The new regulation demands that portfolios contain a full break-down of costs to ensure investments are right for the client – the anticipated costs for the next year must be provided before they invest, too. Unfortunately, MiFID II doesn’t set out a standardised way of doing so, something that may have made comparisons much simpler.

Rathbones are including a quarterly cost summary in all their client valuation reports. A further, annual disclosure will show the total effect of portfolio costs over the past year. When they take on clients from IFAs, Rathbones will provide an estimate of total costs for the coming year.

Achieving best execution for clients

MiFID II says firms must take all sufficient steps to get the best possible deal when trading on a client’s behalf. Also, research costs must be stripped out from trading fees; that means these costs must either be passed on to consumers or paid by DFMs and fund managers.

Rathbones already absorbs the costs of research in their business expenses, so they are well placed to handle this requirement. Rathbone Unit Trust Management, their funds business, will stop passing on research costs to its funds. As part of the disclosure for best execution, Rathbones will be publishing on their website the top five brokers they use to execute trades.

There’s a lot to chew over with MiFID II, but advisers are relatively lucky: most of the changes don’t directly affect their business. Instead, they need to be aware of what the rules require of their partners and how it will affect their clients.

Do you feel prepared for MiFIDII? Please comment below.


This post was created for the DISCUS website based on the article posted on Rathbones. You can find out more about their discretionary investment services here ›