FE have released a white paper today  (15 May) which highlights the challenges facing adviser firms in meeting client reporting requirements under the Markets in Financial Instruments Directive, (MiFID II) - which is to come into effect in January 2018.

The paper summarises client reporting requirements which affect fund managers, platforms, discretionary managers and financial advisers under both MiFID II and PRIIPs, and outlines the scope of each piece of legislation.

“We have highlighted the demands of MiFID II on financial advisers as we think they are greater than many firms are anticipating” comments Mikkel Bates, regulatory specialist at FE. “Advisers cannot afford to be late to the party and need to act now if they are going to be able to deliver the reporting requirements, particularly as they have not previously had such stringent expectations.”

One such expectation, highlighted by the white paper, is that advisers must ensure only the right type of investor invests in funds.  The onus will also be on advisers to provide feedback to fund providers if a fund has been sold outside the target market (which might not make it ‘inappropriate’).  Fund providers will need to use this feedback as part of their product governance. 

Mikkel Bates explained: “Whilst fund managers will provide target market data, advisers will need to be able to feed this into their advice process to ensure suitability. Firms should therefore be reviewing their advice and data sharing processes now to ensure they can comply in January. “

Pre-sale and post-sale reports

MiFID II also requires clients to be provided with several reports both on a pre-sale and post-sale basis, which advisers must present to clients:

• Pre-sale cost disclosure document – MiFID II requires firms to provide ‘appropriate details of costs and charges within good time’ before a sale is concluded. This will set out an annual forecast of costs and charges and their impact on investment returns. There is also a requirement that where an investment is bespoke, reports should be tailored accordingly, and any anticipated spikes or fluctuations in costs such as initial charges and performance fees should be included.
• Quarterly portfolio valuation – These must be provided for all clients who have not checked their valuation online during the quarter.
• Annual personalised costs and charges disclosure – This must include a summary of all product and service costs throughout the year. Clients are also entitled to request a more detailed breakdown of the costs.
• Advice in the case of a 10% drop in a discretionary portfolio’s valuation since the last scheduled valuation – Clients are to be advised of such an event on the same business day and this must be repeated for every 10% fall thereafter.

Mikkel Bates said: “It’s not just a case of printing off a generic document, as the reports need to be personalised for each client, with costs and charges added for each product and service.

While it is unclear who will be expected to create these reports, advisers will be tasked with presenting them to their clients and will be responsible for adding their own costs to those of the products and any platform.”