Rather than providing the necessary transparency, argues Ray Tubman, there are some very clear omissions in, and adjustments needed to, the ex-post costs and charges requirements recently introduced by MiFID II
With the regulatory deadline now upon us, the ex-post costs and charges reporting required by the second iteration of the Markets in Financial Instruments Directive (MiFID II) has been generated. We now all await the feedback from clients and wonder if there will be spikes in call centres resulting from clients finally being aware - in a monetary sense, at least - of the amount of charges being levied on their accounts.
The goal of transparency can only be considered a move in the right direction - after all, there is no conceivable way that hiding this information can be considered ethically justifiable.
There are few industries where a consumer is unaware of what they are being charged for the goods and services received. An exception to this is banking and wealth management because these industries hold the cash of the investor and are at liberty - supported by the fine print in the contracts - just to deduct the charges without any acknowledgement from the client. While some are, no doubt, very charge-conscious there are many others who just accept whatever is charged due to the complexity of the industry and the differential in pricing between different participants.
FinoComp has this year provided the software to perform calculations and generate statements to more than 3.2 million portfolios across more than 30 platforms and wealth management firms either directly or through the end-clients. The roll-out of functionality has only just begun.
So, do the measures introduced by this regulation really provide the transparency that is needed? I think not. There are some very clear omissions and adjustments needed to the current minimum requirements under MiFID II to provide full transparency.
* Pensions should be incorporated: If we are looking to provide transparency to investors regarding the charges they incur, there is no good reason for not including pensions in this regime.
One could easily argue that for pensions, which are inherently long-term savings vehicles, the effect of fees and charges are most significant on the long-term objective of providing income in retirement. The longer-term the investment, the more compounding effects fees and charges have on the final outcomes.
* More asset types should be incorporated: Not all types of assets are currently required to be reported under this regulation. For any life company with insured funds, for example, there is no necessity to report the charges inherent in the insured fund.
Again, I can see no reason why such investment vehicles should not be included in transparency requirements. From an end-client perspective, they are investing in a fund - whether it be an insured fund, unit trust or other collective investment vehicle is generally beyond their knowledge or interest. Why should reporting requirements differ?
* Platforms make this harder: Most clients of platforms incur a platform charge at an investor level that covers all wrappers (and often deducted from a single general investment account). If there is a specific requirement to exclude certain products or certain investment instruments, how are those platform charges to be treated.
To consider only proportions of charges to represent the proportion of the assets in MiFID II assets or wrappers seems to be excessively complex and to serve the only purpose of begrudgingly limiting transparency merely to the regulated assets
* Who came up with those charge categories? For me, the MiFID II segregation of the charges into the categories of ‘upfront', ‘ongoing', ‘incidental', ‘ancillary' and ‘transactional' (for investment services and investment products) does not get to the core of what investors need to know.
Something as simple as the category of ‘investment services - ongoing charges' contains an amalgam of platform administrative charges and ongoing advice charges. These are two fairly basic and very separate charges and combining them together in a single figure smells a little like the bundled charge structures of the past (except monetarised rather than a simple percentage).
The key here is that regulation that aims to promote transparency to retail investors should go to the next level of reporting the recipients of the charges. From my perspective, the investor needs to understand: how was the charge paid, how much was it and what was it for? The industry should consider generating charge advices with the regulated categories further split between the charge recipients.
* A single statement once a year is not good enough: The current requirement is that investors receive a statement once a year at minimum. That is simply not enough. We have all read in the press recently the issues facing advisers on this topic.
Different platforms are generating a single statement once a year based on a date range of their choosing - calendar year, financial year and so on. Advisers who use more than one platform - which is most of them - have to deal with the potential of different platforms providing statements for different periods for the same client. Furthermore, the flexibility for advisers to select periods that coincide with their client reviews demands further complex processing.
In its interim report into platforms last year, the Financial Conduct Authority also indicated its view that charge transparency be openly available whenever advisers or clients log into their portals.
Many platforms have very limited ex-post charge reporting capability and, for those platforms, this reporting is inherently a batch process that will prove to be extremely difficult to enhance to be flexible enough to serve the needs of advisers. They will always be limited to a fixed reporting period and will never be able to offer online information across flexible reporting periods without wholesale changes to their technology.
In some cases, a minimum regulatory offering has been produced for the first run and there are immediate plans subsequently to roll out daily ex-post costs and charge information to be accessible by advisers and clients online and with flexible reporting periods.
Where do we go from here?
The first round of ex post costs and charges reporting has been completed. Given the reported problems now facing advisers, some platforms will start extending the service offering to advisers to make ex post costs and charges information available online and with flexible reporting periods.
Of course, not all platforms will be so quick to turn this around and some will need to replace existing interim solutions to be able to achieve this. It is likely larger adviser groups will move to take this report production into their own hands and use platform sourced data, combined with other off-platform holdings and produce their own according to their own client review periods and so on.
While the first round of regulatory reporting is now all but over, for this transparency regulation to be sustainably achieved, a lot of work still has to be done across the sector.
Ray Tubman is CEO of FinoComp
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