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FCA raises costs and disclosures ‘concerns’ following MiFID II review

1 March 2019

The Regulator has published its findings following supervisory work where it looked at the costs and charges disclosures ex-ante of 50 firms authorised as MiFID investment firms.

The findings raised “some concerns with the way that firms were carrying out these responsibilities”, the regulator said.

The FCA review can be found here: https://www.fca.org.uk/publications/multi-firm-reviews/mifid-ii-costs-and-charges-disclosures-review-findings?twitter

The rules require firms to disclose all costs and charges to customers in good time before they provide the relevant service to the client. The information has to be given to clients in an aggregated form and include an illustration to show the effect of costs on returns.

The regulator said although all the firms were aware of the rules and their responsibilities and were trying to comply with them, they were “not interpreting the rules consistently”.

It also found “reasonable evidence that their efforts are hampered by required data not being available”.

The regulator provided examples of what it saw as good and bad practice.

Examples of good practice

As examples of good practice “that demonstrate compliance with or, in some cases, go beyond the requirements for transparency of costs and charges” the regulator cited the following:

The training of staff to ensure their understand how their firm has implemented the costs and charges disclosure requirements, as well as testing of staff understanding of the rules, as part of their cycle of regular ongoing training sessions.

Application of the MiFID II disclosure standards to products that did not fall under MiFID rules “to give customers a clear and consistent illustration of costs” – although the FCA noted this was not a regulator requirement as yet. It also noted that firms said “it was difficult to get the appropriate information from manufacturers of non-MIFID products.”

Using “technological innovation” in disclosing costs and charges, for example, interactive sliding scales showing the impact of charges on investments over adjustable investment amounts and timescales. “We also saw firms making breakdowns of charges accessible via pop-ups and hyperlinks. Many of the firms were developing technological solutions to gathering and disclosing the data required to meet the rules.”

Practice requiring improvement

The regulator said that despite general improvements in levels of compliance since January 2018 “overall, the industry has been slow to comply with the relevant rules”.

It listed nine examples of practices the FCA said it expected firms to address. They can be read in full here under Areas of Improvement.

In summary these were:

1. Under MiFID II firms need to calculate and disclose ‘transaction costs’, which include those from buying and selling underlying assets in an investment product. Firms disclosing their own transaction costs but not disclosing investment product transaction costs. “This meant that the distributor firms’ aggregated figures were wrong.”

2. MiFID II requires that firms give customers itemised breakdowns of costs and charges at the customer’s request. It is also expected (in the ESMA’s Q&A ) that the breakdowns “should be adequately signposted for investors”. ESMA suggests that best practice for disclosing costs and charges online would be to enable a client to get this information through hyperlinks.

3. The regulator said that “a few firms were prominently advertising low costs while disclosing higher aggregated costs in less visible parts of their website”. It said this practice “is unlikely to meet the requirements that marketing material be fair, clear and not misleading, and that information in marketing communications is consistent with that provided to clients in the course of providing services”.

4. Examples were also found of “firms being inconsistent in their cost disclosures” at different parts of the customer journey, such as in marketing and generic pre-sale disclosure and their tailored point-of-sale disclosures.

5. Failure to disclose costs and charges as cash amounts as well as the long-standing industry practice of quoting percentage figures.

6. One way to illustrate the impact of percentage charges over the lifecycle of example investment is to use sample investment amounts and timescales. We found that some firms using this method chose very large cash amounts and very short time periods. While this practice may mirror some investment behaviour, firms should be using examples that reflect general customer experience rather than selecting numbers that are easy to calculate.

7. The FCA said it did not agree with the interpretation of the rules taken by some firms, which had left out transaction and incidental costs and charges because they could not get the necessary data – on the basis that this was complaint as the rules allowed them to estimate the costs as zero. The regulator said: “In the absence of actual costs to use as a proxy, the rules do allow firms to use reasonable estimates. However, firms should make ‘a reasonable and sufficiently accurate estimate of the total costs of the financial instrument’ as explained in ESMA Q&A 11 on costs and charges. Firms should also review pre-sale assumptions based on post-sale experience and adjust where necessary.

8. Some firms were marketing costs and charges as lower than “out-of-date industry averages”. The regulator said it considered such comparisons “to be potentially misleading” for consumers. “If firms want to compare their own costs with competitors, they should consider if these costs are up-to-date and subject to the same disclosure rules”.

9. The regulator also flagged that some firms were not disclosing costs for the products and services of other firms to the same standard as their own disclosures, noting this was “particularly evident with ‘execution only’ platforms’ disclosures of fund charges”. The regulator said it encourages firms that manufacture products “to ensure their costs and charges are available to all firms that distribute them. We also expect firms that distribute products to ensure that customers have all the costs and charges for all distributed products in good time.”

Contradictory or conflicting disclosure rules

Addressing the concerns raised by “many of the firms we spoke to” around “what they considered to be contradictory or conflicting disclosure rules”, the regulator said while the interaction between MiFID II, the PRIIPs Regulation and the UCITS Directive “is not seamless and we know that customers value clarity as much transparency…  firms must comply with all relevant requirements when disclosing costs and charges.

It added that firms that produce or distribute a UCITS or a PRIIP “can publish costs and charges information beyond that which is contained in the UCITS KIID or KID as long as the information:

  • is fair, clear and not misleading;
  • complies with relevant requirements (for example MiFID II costs and charges disclosure rules); and
  • does not contradict or diminish information in a KIID/KID

It added thatunder MiFID II costs and charges requirements, distributor firms “should ensure that they are disclosing manufacturers’ costs and charges as clearly and consistently as they disclose their own costs and charges.”



Professional Paraplanner