We have lost count of the number of articles on MifFID II recently. It would appear a multitude are issued on a daily basis, but one from our friends at Brooks Macdonald caught our eye recently as it focused entirely on the requirements for financial advisers.
One of the challenges of MiFID II is that it’s often unclear as to where responsibility lies for the implementation and many advisers have told us that they’re still not 100% sure as to what they have to do. With less than 99 days to go we thought this update was definitely worth sharing.
The article covers 10 frequently asked questions received from Professional Adviser, including:
1. What are my new responsibilities surrounding ‘depreciation reporting’?
2. Will I have to change my documentation?
3. How will MiFID II change the way costs relating to client investment activities are measured and borne?
4. What are Legal Entity Indentifiers (LEIs) and who needs them?
5. How will product governance change under MiFID II?
6. How will suitability assessments change?
7. How will product classifications change under MiFID II?
8. Is there any change regarding appropriateness?
9. What are the changes to the rules on best execution?
10. What are my responsibilities around telephone recording?
Here’s a taste of some of the questions and answers and you access the full document here.
Q3. How will MiFID II change the way costs relating to client investment activities are measured and borne?
Under MiFID II, there will be significant changes to both the ex-ante and ex-post costs and charges to clients. Firms will be required to provide an aggregate of, and ongoing information on, all costs and associated charges. The new regulations are more onerous and we anticipate significant changes will be made to the information disclosed to clients.
Although there will be no set template to follow, at the very minimum firms will be required to disclose:
» The cost of advice
» The costs associated with any recommended investments
» The costs associated with third party services
Our expectation is that costs will be aggregated; however, itemised breakdowns should be available to clients at any point they are requested.
Ex-ante costs will also need to be shown prior to the point of sale, alongside their potential cumulative effect on the investment’s return profile. For ex-post, itemised breakdowns will need to be provided, at least annually. The deadline for implementing this change will be in 2019, but the data must be captured from 3 January 2018.
Other costs, such as entry costs, exit costs and performance fees will have to be made available for different products from 3 January 2018. Furthermore, cost-based transaction analysis is likely to become more demanding under MiFID II.
Given the significance of these changes, we expect further regulatory guidance to be provided before the end of the year and potentially into early 2018.
Q5. How will product governance change under MiFID II?
There will be significant changes to product governance obligations and a clearer definition between what is required of product manufacturers and product distributors.
In broad terms, firms will have to clearly assess their target market. This will include identifying both the investor type, i.e. retail, professional or eligible counterparty, and also their knowledge and experience, i.e. basic, informed or advanced. There will also be a greater emphasis on capacity for loss within the assessment of a client’s risk tolerance and objectives. Furthermore, advisers will have to consider target market assessments in addition to suitability assessments. You can access the full answer here in the PDF.
Q6. How will suitability assessments change?
In the UK, the Retail Distribution Review’s (RDR) suitability requirements largely meet those of MiFID II. However, there are a few areas where advisers may want to reconsider their approach to suitability assessments.
Under MiFID II, additional suitability obligations will include the application of assessments when making recommendations to hold or sell investments. There will also be enhanced requirements to review and report on suitability on a continuing basis; in this regard, advisers may want to consider the implications of what ‘continuing’ means.
If you are interested in reading the answers to more of the questions above, you can download the full PDF here.