As part of our supervision work, we looked at the costs and charges disclosures of a sample of 50 firms authorised as MiFID investment firms in the retail investments sector. We wanted to understand if firms were complying with the new rules and what challenges they found in doing so.
We found that these firms knew about their obligations for disclosing costs and charges, but interpreted the rules in a variety of ways. They were better at disclosing the costs of their own services than at disclosing relevant third-party costs and charges. We found evidence that firms were not sharing their costs and charges with each other to meet their obligations to provide aggregated figures to clients.
What we looked at
MiFID II came into effect on 3 January 2018. Since then, firms have had to meet strengthened requirements on disclosing information about costs and charges. Firms should refer to chapter 6 of our Conduct of Business Sourcebook and the relevant provisions of the MiFID Delegated Regulation (2017/565/EU) to understand the rules on cost and charges disclosure. Firms may also find it helpful to refer to the Questions and Answers on investor protection under MiFID II published by the European Securities and Markets Authority (ESMA).
How we chose the firms in our sample
For this review, we identified a number of MiFID investment firms whose costs and charges disclosures did not appear to fully comply with the relevant disclosure requirements introduced under MiFID II.
From these firms, we selected 50 to provide the sample set for our review. In selecting these firms, we aimed to include a range of firms undertaking different types of business from across the retail investment sector. These included investment fund managers, direct-to-customer investment platforms, firms offering automated advice or discretionary investment management, and more established discretionary investment managers. We chose a broad cross-section of firms to help us understand the challenges that different types of firm might be finding when trying to comply with the requirements.
How we assessed compliance
Our review focused on disclosures on firms’ websites and their communications to retail clients. We asked each firm in the sample to explain its disclosures and to outline the steps they were taking to ensure their disclosures complied with relevant requirements.
MiFID II costs and charges disclosure rules require that firms give clients information on all costs and associated charges in good time before they provide the relevant service to the client. Such disclosures are referred to as ‘ex-ante’ (before the event) disclosures. Firms must give clients this information in an aggregated form and include an illustration to show the effect of costs on returns. The rules also require firms to provide regular post-sale statements of actual charges called ‘ex-post’ (after the event) disclosures. In this review, we only looked at firms’ ex-ante disclosures.
We carried out the review to help us:
- assess firms’ level of compliance with the rules
- identify firms that are failing to comply
- understand how well firms are sharing cost and charges information with each other to enable them to meet their obligations to provide aggregated figures to clients
- understand what effect the new rules are having in improving the transparency of firms’ communications with customers
What we found
All the firms we looked at were aware of the rules and their responsibilities to disclose all costs and charges to customers. We have some concerns with the way that firms were carrying out these responsibilities, which we outline below in the ‘areas for improvement’ section.
The firms in our sample were not interpreting the rules consistently. But it was clear that most of them had given this serious consideration and were trying to comply with the rules.
Firms who did not demonstrate compliance with the relevant rules often said this was because it was difficult to get all the required data from third-parties. This meant they were reluctant to implement technology upgrades to support information disclosure to clients as they weren’t confident about the accuracy and delivery of these data. Some firms appeared to be keeping upgrades on hold because they were anticipating further unspecified regulatory intervention.
We found that firms are seeking to comply with the new requirements. But, equally, we found reasonable evidence that their efforts are hampered by required data not being available. These difficulties are compounded when firms try to apply the same approach to disclosure to non-MiFID products in their efforts to deliver greater transparency to customers.
Examples of good practice
We found examples of good practice that demonstrate compliance with or, in some cases, go beyond the requirements for transparency of costs and charges.
The following are examples of steps firms have taken which go beyond the express requirements of the disclosure rules. Firms may find these examples helpful as they as they continue to embed compliance with the requirements on costs and charges disclosure within their firms:
- Some firms have provided training for staff to ensure they understand how their firm has implemented the costs and charges disclosure requirements. We saw examples of firms testing their staff's understanding of these rules as part of their cycle of regular ongoing training sessions.
- At the time of MiFID implementation, we decided not to apply MiFID’s costs and charges requirements to non-MiFID business. But we found that firms that offered non-MiFID products were often applying the MiFID II disclosure standards to these products to give customers a clear and consistent illustration of costs. However, these firms said it was difficult to get the appropriate information from manufacturers of non-MIFID products.
- We found several examples of technological innovation in disclosing costs and charges. These included 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.
Areas of improvement
In the months after 3 January 2018, we identified high numbers of firms not complying with the updated costs and charges rules. By the second half of 2018, levels of compliance had improved and most firms were satisfying the requirements. However, some firms still have work to do. Our review suggests that, overall, the industry has been slow to comply with the relevant rules.
There were examples of practices that we expect firms to address:
- MiFID II introduced a need for firms to calculate and disclose ‘transaction costs’. These costs include those from buying and selling underlying assets in an investment product. We saw many examples of firms that distribute investment products disclosing their own transaction costs but not disclosing investment product transaction costs. This meant that the distributor firms’ aggregated figures were wrong. This was widespread early in 2018 and, while we saw improvement as the year progressed, some firms are still not disclosing them.
- MiFID II requires that firms give customers itemised breakdowns of costs and charges at the customer’s request. However, where firms choose to volunteer these breakdowns, they should be adequately signposted for investors. ESMA’s Q&A shows it expects an investment firm to take reasonable steps to minimise the effort required for a client to request an itemised breakdown. ESMA further suggests that best practice for disclosing costs and charges online would be to enable a client to get this information through hyperlinks.
- A few firms were prominently advertising low costs while disclosing higher aggregated costs in less visible parts of their website. Such a 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. We told those firms to change their disclosures accordingly.
- We found examples of firms being inconsistent in their cost disclosures depending on the stage of the customer journey. Some firms’ generic pre-sale disclosure figures differed significantly from their tailored point-of-sale disclosures. This was particularly the case when they had left out investment product transaction costs from pre-sale disclosures. Firms must ensure information in marketing is consistent with any separate information they give customers.
- The disclosure rules aim to improve transparency by requiring firms to disclose costs and charges as cash amounts as well as the long-standing industry practice of quoting percentage figures. In the first half of 2018, we found several examples of firms failing to incorporate cash equivalents in their disclosures. The situation improved in the second half of the year, but some firms still do not consistently include charges as both cash amounts and percentages.
- 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.
- Some firms told us that they were leaving out transaction and incidental costs and charges because they could not get the necessary data. They explained that this was compliant as the rules allowed them to estimate the costs as zero. We do not consider this an appropriate interpretation of the relevant rules. 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.
- Some firms marketed their costs and charges as lower than out-of-date industry averages. We told these firms to improve their marketing on the basis that we 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.
- Firms are not disclosing costs for the products and services of other firms to the same standard as their own disclosures. This was particularly evident with ‘execution only’ platforms’ disclosures of fund charges. We encourage 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.
UCITS, PRIIPs AND MiFID II
Many of the firms we spoke to raised concerns about what they considered to be contradictory or conflicting disclosure rules.
The costs and charges disclosure requirements in MiFID II apply in addition to the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation that requires firms to produce the standardised Key Information Documents (KID). Products that are Undertakings for Collective Investment in Transferable Securities (UCITS) are currently exempt from the PRIIPs Regulation. This means UCITS manufacturers should continue to produce a Key Investor Information Document (UCITS KIID). MiFID II costs and charges disclosure rules apply to investment firms providing services both for PRIIPs (which are financial instruments) and UCITS.
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. However, firms must comply with all relevant requirements when disclosing costs and charges. 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
When firms provide an investment service for a UCITS, MiFID requires them to disclose costs and charges information which may not be included in the UCITS KIID. In this case, Article 50(4) of the MiFID Delegated Regulation requires the firm to liaise with the UCITS management company to get the relevant information.
The MiFID II costs and charges requirements necessarily require investment firms to liaise with product manufacturers to ensure that consumers have accurate costs and charges disclosures. Manufacturer firms should ensure they clearly and consistently disclose their products’ costs and charges to distributors. Distributor firms should ensure that they are disclosing manufacturers’ costs and charges as clearly and consistently as they disclose their own costs and charges.
We expect all firms to review their own costs and charges disclosures to ensure that they are satisfying all relevant requirements for their ‘ex-ante’ costs and charges disclosures, and ensure they are complying with the relevant rules. Where we have identified issues with specific firms we have asked them to improve their disclosures. We will be following up with them to ensure they have made the appropriate changes.
Firms should be particularly alert to the need to disclose all ‘transaction’ and ‘incidental’ costs and charges to customers. We remind them that all communications to customers about their MiFID business must be fair, clear and not misleading.
Where we do not see improvement in firms’ costs and charges disclosures we will consider whether further action is required. This could include more detailed investigations into specific firms, individuals or practices.