FE runs through what all that you need to know on Markets in Financial Instruments Directive (2014/65/EU) (“MiFID II”).

What is MiFID II?

Rules aimed at promoting the integration, competitiveness & efficiency of EU financial markets. It will strengthen protection for retail investors through limits on use of commissions & disclosure of costs & charges. Firms will have to implement a number of system changes and, in certain instances firms may be dependent on data vendors being able to supply appropriate data.

Time line:

NB: The European Commission was meant to report on final technical guidance on Mifid II by this summer, but this is now expected by the end of September or early October.

Key impacts:

Inducements –

• For any firm giving independent advice or discretionary portfolio management they will no longer be able to accept fees, commission or any monetary benefits from 3^rd parties
• Abolish payment for research with dealing commission. –must now pay research from own pocket or agree client a separate research payment account paid into directly by client.

Costs & charges –

MiFID II is intended to improve the information available to clients on costs and charges. In this respect its concerns are similar to those highlighted by an FCA review earlier this year which concluded that most asset managers were failing to provide retail investors with clear ‘all-in’ figures on fund charges. In particular,

MiFID II requires that clients should be given an aggregated overview of all the advisory firm’s costs and charges and should be able to obtain an itemised breakdown on request. The information should also enable the client to understand the cumulative effect of costs and charges on the investment return. And information should be provided not only at point of sale but also at least annually thereafter.

It proposes that investment firms report all costs – based on real data and forecasts – as an aggregated cash amount or percentage from January 2017. This figure will include initial and ongoing costs, transaction, custody and research costs, performance fees and exit charges.

The Investment Association (IA), which represents asset managers in the UK, is now proposing that funds should disclose at least six separate figures, including yearly charges, performance fees, transaction costs, financing costs and taxes, plus one-off charges such as entry fees.

Transaction Reporting -

The information to be included in transaction reports is to be extended. For example, reports will include a short-selling flag, and information about who executed the trade and who made the investment decision. 

Portfolio reporting -

Firms will need to send quarterly portfolio valuations to clients unless they provide online valuations and can demonstrate that the client has accessed the valuation during the quarter. In the event that the value of the portfolio falls by 10 per cent, clients have to be provided with a valuation.

Legal Entity Identifiers

All “legal entities” – which includes many hundreds of thousands of relatively small entities, including charities and trusts – will need to obtain and pay for a Legal Entity Identifier to be included in the transaction report before they can trade or ask for trades to be done for them. Not only that, but the LEIs have to be renewed and paid for annually. Natural persons must also have a unique client ID, which for UK individuals will normally be the National Insurance number.

Complex Products

All shares in non-Ucits collective investment products, such as investment trusts, may be defined as complex, The label of “complex” will mean that firms have to complete an appropriateness test every time a client wishes to invest in the asset on a non-advised basis.

PRIPS

All PRIPs (packaged retail investment products) will need to produce a KIID.

What does it mean for each of the below? What will they now need to potentially do?

-          Fund providers

• New rules on inducements must be applied.
• Launch free of trail share classes.
• Manage transfer of assets with supporting platforms/etc
• Disclose all costs and fees, inclusive of transaction costs and performance fees
• Produce KIIDs for any PRIPs

-          Advisors/ Wealth managers

• Need to enhance their appropriateness testing for clients. Increase the reporting frequency of portfolios and encompass the stricter requirements for demonstrating best execution.
• No trail commission.
• New need to keep records of conversations with clients – (does not include over the phone)
• Portfolio transaction reporting
• Full disclosure of costs (product/platform/advisory)

-          FE/ Data vendors

• Ensure any new fund costs data fields such as costs are incorporated into database
• Prepare for the prospect of additional trail free share classes developed from post MiFID II in European countries yet to extensively roll out trail free units.
• Maintain those funds which are clean/buyable.
• Consideration on primary policies (as per IA’s new policy post RDR)
• Manage track record extensions for new share classes
• Collect & distribute KIIDs for PRIPs

-          Research and client reporting products eg analytics?

• Ensure the new fund data fields involved in costs are incorporated into products.
• Consult with advisors on their requirements if any on the tool to fulfil appropriateness testing for clients i.e. effects of investments in varying market conditions / effect of costs
• Support portfolio transaction reporting?
• Short selling flag
• Record who executed a trade
• Record who made the investment decision