Asset managers / RDR/MIFID-II/PRIIPS –

The key considerations and forthcoming changes for Asset Management firms in ensuring the costs and charges of services offered are clearly disclosed to investors and how it can be an advantage for firms that do it effectively are considered below.

Introduction

1. Across the European and domestic regulatory landscape, clarity and transparency remain two of the most pressing issues.

2. The Retail Distribution Review (RDR) targeted the clear and transparent disclosure of costs within the retail advice market and now the forthcoming MiFID II Directive and the FCA’s Asset Management Market Study, which will look at whether asset management services are providing value and whether firms are able to manage costs along the value chain, are set to take this even further.

3. The introduction of MiFID II and the Packaged Retail and Insurance-based Investment Products (PRIIPS) regulations will introduce a number of changes to charges and cost disclosure requirements.

4. Firms will need to ensure that costs and charges are included within the design, development and launch stages of all new products and services, with charges and disclosure practices regularly reviewed as part of a robust governance framework.

New Charging Rules under MiFID II

1. A wide range of financial services and wholesale firms will be obliged to disclose all costs to their clients under MiFID II rules, either
   1. as a percentage of their investment or
   2. as an aggregated cash amount.
2. The disclosure should include the
   1. initial and ongoing costs,
   2. performance fees and research costs,
   3. exit charges,
   4. transaction custody and
   5. research costs and
   6. all other costs encountered during the course of servicing a client.
3. The PRIIPs regulations are also set to introduce similar cost disclosure requirements for UCITS funds at the end of 2019.

4. In order to make an accurate representation of the total costs, firms need to ensure that the costs incurred throughout the product life-cycle and those involved in the execution of orders are captured.

5. The new MiFID II rules mean that Asset Managers will have access to additional execution information to enable them to monitor the performance of their execution arrangements, this will also be reported to the FCA.

6. In order to capture and aggregate the necessary information, firms may need to amend their systems and controls and information gathering procedures.

7. Another key challenge for firms is to provide clients with a forecast of the cumulative effects of the charges on a client’s return on investment. These costs will need to be reported, at least annually, to clients.

Ensure Clarity and Consistency

1. To avoid creating confusion, or misleading customers, firms need to ensure cost disclosures are consistent across all client documentation.
2. To adhere to the FCA’s requirements that all communications are clear, fair and not misleading, all disclosures must accurately reflect the services being provided and be written in clear, plain English.

3. One finding of the FCA’s recent thematic review into the clarity of fund charges was that a number of firms imposed administrative charges which didn’t correlate with the activity being conducted. These practices hinder a client’s ability to assess whether they are receiving value for money and are therefore not in their best interests.

4. The FCA’s additional thematic work, conducted in summer 2015, around whether funds and segregated mandates are meeting investor expectations, also focussed on fund documentation and, alongside the scope of the market study, demonstrates this is one area of key importance for the FCA and European regulators within the sector.

5. Firms should consider using the ongoing charge figure (OCF) across all key product documentation, supported by a clear description of the direct and indirect transaction costs incurred during the year.

6. Costs and charges should be compared to similar funds as part of the regular product reviews and firms should seek to understand how easily the fund characteristics are understood by investors. These processes need not be overly time consuming and can also deliver reputational benefits alongside compliance.

Consider the Presentation

1. When designing documents to disclose the cost of services, theoretical examples of the different costs and charges could be a more effective way of helping investors understand the service they are receiving.
2. Other media and technology may also go some way to improving understanding around the key product features or charges.

Conclusion

1. There is a risk that if firms are not on top of their costs and do not provide clear disclosure of their costs and charges when the new transparency requirements come into force, investors may be tempted to transfer their business to firms they can more easily identify as offering better value-for-money.
2. Those firms who promote transparency and are seen to be open and engaging with the end investor may find themselves with increased client loyalty and a clear competitive advantage in the future.