Regulation: Client reporting under PRIIPs and MiFID II
8 August 2017
Mikkel Bates, regulatory consultant at FE, looks at the changes coming in under PRIIPs and MiFID II in 2018 and how they will affect the material and information that needs to be provided to the client.
There are now around five months until the live date for PRIIPs and MiFID II, so how ready are you for the new client reporting requirements? Do you know what information you need to provide, how and when you need to issue it and how you are going to collect the data needed?
The application of the PRIIPs Regulation is relatively straightforward for adviser firms, because it is basically an extension of the existing need to provide a Key Investor Information Document (KIID) to clients before they invest in a UCITS fund.
PRIIPs (Packaged Retail and Insurance-based Investment Products) are pretty much all packaged investment products and you will need to provide all retail clients with a prescribed pre-sale Key Information Document (KID).
There are several things you need to bear in mind about PRIIPs and their KIDs:
MiFID II is much broader in scope than PRIIPs, because it affects your dealings with all clients, not just retail, and applies from before a client first deals until after they cease to be a client.
Whereas PRIIPs is all about disclosing the risks, costs and possible returns of investment products, MiFID II is about almost everything else, from transparency of trading venues, recording client conversations and how fund groups pay for research to product governance, providing client valuations and disclosing all costs (including product costs, platform charges and adviser charges).
I will focus here on what information you need to give clients at every stage of the journey.
You need to provide these reports before any sale from 3 January 2018.
Fortunately, a European Working Group, made up of trade bodies and fund groups across Europe, is working on a standardised European MiFID Template (EMT) to deliver the product costs and target market data you need. You then need to add your own costs and those of any platform(s).
Because MiFID II comes in at the start of next year, the post-sale reporting needs to refer to the relevant periods starting after then, so the first annual costs and charges reports won’t be sent out until early 2019. But the information must be collected from January 2018.
The EMT provides the raw product costs you need for the post-sale reports, but you need to make adjustments to report on the costs that have been incurred by each client, based on how long they have held an investment and any activity on their account. Both the pre-sale and post-sale costs and charges reports need to show both monetary amounts and percentages.
Target market feedback
The final piece in this jigsaw is reporting back to fund groups if you have sold funds to clients who are outside the designated target market. What information you need to feed back up the chain is yet to be agreed, but it is likely to be an exceptions report and you need to do this at least annually.
Fund groups need to include this feedback in their ongoing product governance process, but the practical difficulties were compounded by the European regulator, ESMA, in July, with its pragmatic approach. It confirmed that using an apparently inappropriate (e.g. too risky) instrument in a diversified portfolio or for hedging purposes could make it appropriate after all. This is something the industry has been saying for a long time, but it will be almost impossible to show when funds have been used like that on the feedback report.
There are exceptions or qualifications for almost every requirement shown here, but these are the core client reports advisers will need to provide from the start of next year.
More information or support in this area can be obtained from FE at: firstname.lastname@example.org
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