MiFID II rules on disclosure of costs and fees require firms to provide their clients with timely information on all related costs and charges before providing the relevant service to the client. These disclosures are called “ex ante” disclosures (before the event). Companies should provide customers with this information in aggregate form and include an illustration to show the impact of costs on returns. The regulation also requires businesses to regularly submit after-sales reports of actual expenses, known as “after-the-fact” disclosures. In this report, we have only looked at companies` ex ante information. Other costs, such as search and custody fees. For the purposes of this review, we identified a number of MiFID investment firms whose disclosure of costs and fees did not appear to fully comply with the relevant reporting requirements of MiFID II. These are the costs paid to investment firms at the beginning or end of the investment service provided. Examples include filing fees, cancellation fees, and switching costs. Costs should be aggregated and expressed both as a monetary amount and as a percentage of the average net asset value (NAV). This should be accompanied by a graph showing the cumulative impact of costs on returns. We found examples of good practice demonstrating or, in some cases, exceeding compliance with cost and fee transparency requirements.
We expect all companies to verify their own information on costs and fees to ensure that they comply with all relevant requirements for their ex ante information on costs and charges and that they comply with relevant regulations. When we identified issues with certain companies, we asked them to improve their disclosures. We will contact them to ensure that they have made the appropriate changes. Annualized expected costs should be made available to all potential investors before making an investment decision. MiFID II requirements on costs and fees necessarily require investment firms to work with product manufacturers to ensure that consumers receive accurate information on costs and charges. Manufacturing companies must ensure that they disclose the costs and fees of their products to distributors in a clear and consistent manner. Distributors should ensure that manufacturers` costs and fees are disclosed as clearly and consistently as their own costs and fees. On 3 January 2018, the publication of MiFID II costs and charges was introduced. For the first time, companies were required to provide end-investors with all costs and fees related to their investment services and activities.
Below are examples of actions taken by companies that go beyond the explicit requirements of disclosure rules. Firms may find these examples useful when they continue to integrate compliance with cost and fee disclosure requirements into their businesses: when firms provide an investment service to a UCITS, MiFID requires them to disclose information on costs and charges that may not be included in the UCITS KIID. In this case, Article 50(4) of the MiFID Delegated Regulation requires the firm to be in contact with the UCITS management company in order to obtain the relevant information. As part of our supervisory work, we examined the disclosure of costs and fees for a sample of 50 firms authorised as MiFID investment firms in the retail investment sector. We wanted to know if companies are complying with the new rules and what challenges they face. In the following months 3. In January 2018, we found that many businesses were not complying with the updated cost and fee rules. In the second half of 2018, the level of compliance improved and most companies met the requirements. However, some companies still have a lot of work to do. Our audit suggests that, overall, industry compliance with the relevant rules has been slow. These are all costs associated with transactions carried out by investment firms.
Examples include cash entry and outflow fees, brokerage commissions, foreign exchange fees, and bid-ask spreads. 3. Reporting on the cumulative impact of costs on returns MiFID II`s cost and fee disclosure requirements are in addition to the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, which requires firms to prepare standardised key information documents (KIDs). Products that are undertakings for collective investment in transferable securities (UCITS) are currently exempt from the PRIIPs Regulation. This means that UCITS manufacturers should continue to produce a Key Investor Information Document (UCITS KIID). MiFID II`s rules on costs and fees apply to investment firms providing services to both PRIIPs (which are financial instruments) and UCITS. Although the above disclosure requirements apply to MIDs, investors increasingly expect all investment firms to report their costs and fees. As a result, AIFMs are indirectly affected by this new regulation, although they are not part of the Directive.
The interaction between MiFID II, the PRIIPs Regulation and the UCITS Directive is not transparent and we know that clients value clarity over transparency. However, companies must comply with all relevant requirements when disclosing costs and fees. Entities producing or distributing a UCITS or PRIIPs may disclose information on costs and charges that go beyond the information contained in the UCITS KIID or key information document, provided that the information: All the firms we examined were aware of the rules and their responsibility to disclose all costs and charges to clients. We have some concerns about how companies have carried out these tasks, which we describe in the “Areas for Improvement” section below. We found that these companies were aware of their obligations to disclose costs and fees, but interpreted the rules in different ways. They were better able to disclose the cost of their own services than to disclose the relevant costs and fees of third parties. We found evidence that companies did not share their costs and fees to meet their obligations to provide aggregate figures to their customers. 2.
Reporting costs for the last three years (retrospective, also known as ex post) The average annualised costs incurred over the last three years must be communicated annually and in a personalised manner to each investor. Businesses should pay particular attention to disclosing all “transaction” and ancillary costs and fees to customers. We remind them that any communication with clients regarding their MiFID activities must be fair, clear and not misleading. MiFID II entered into force on 3 January 2018. Since then, companies have had to comply with stricter requirements for disclosing information on costs and fees. Companies should refer to Chapter 6 of our Conduct of Business Sourcebook and the relevant provisions of MiFID Delegated Regulation (2017/565/EU) to understand the rules on the disclosure of costs and fees. Firms may also find it useful to refer to the questions and answers on investor protection under MiFID II published by the European Securities and Markets Authority (ESMA). If we do not see an improvement in the disclosure of costs and fees by businesses, we will consider whether further action is needed. This could include more detailed investigations into specific companies, individuals or practices.
We have found that companies are trying to comply with the new requirements. But we also found reasonable evidence that their efforts are hampered by the fact that the necessary data is not available. These difficulties are exacerbated when companies try to apply the same approach to disclosure to non-MiFID products in order to provide greater transparency for customers. There have been examples of practices we expect from companies, so it is important that MIFIDs and managers take practical steps to ensure they remain on the right side of regulators and investors. The companies in our sample did not interpret the rules consistently. But it was clear that most of them had given it serious thought and tried to play by the rules. 1. Immediate response to investor cost requests (prior to the event, also known as ex ante) Our review focused on disclosure on companies` websites and their communications with retail clients. We asked each sampled company to explain its information and the steps it took to ensure that its information complied with the relevant requirements.