Are you ready to disclose costs and charges?

David Tiller

David Tiller, Head of UK Propositions at Standard Life, clarifies the imminent MiFID II disclosure requirements, and how Standard Life platforms will support advisers to fulfil these.

MiFID II is back. And things are no less confusing than this time last year.

As you’re no doubt aware, MiFID places a requirement for all ‘distributors’ to disclose actual costs and charges on an annual basis, starting in January. That sounds relatively simple if platforms provide the information required.

But there’s a confusing twist. MiFID doesn’t distinguish between platforms and advisers; both are considered as ‘distributors’, so both have to disclose costs and charges to customers. Disclosure on this scale is no small matter for platforms – issuing letters to potentially hundreds of thousands of clients isn’t something that can be done overnight.

So realistically, will platforms be ready to support you meet your disclosure requirements in a timescale that’s practical for you?

Here I clarify what we all need to deliver and when, and how we’ll support you with this latest MiFID requirement.

The trouble with the timescales

Industry consensus, supported by the Tax Incentivised Savings Association (TISA), is that it’s acceptable for platforms to be ready to provide the full disclosure information by the end of the first quarter 2019 – a reasonable timescale given the logistical challenges involved.

But if that’s the only disclosure option a platform is planning to make then you effectively lose any and all control over client disclosure. What’s more, if you’re expecting to begin disclosure in annual client reviews from the New Year, then you may find that platforms haven’t made provision for this.

If platforms are unable to support disclosure until the end of the first quarter of 2019, do you have enough control to be accountable – to regulators and to clients – from when you need to be?

What Standard Life platforms will do to support disclosure

Platforms are responsible for meeting their own regulatory requirements and also supporting you, the adviser, at a time, and in a manner, that helps you fulfil your obligations; platforms are after all custodian of your clients’ assets.

So from early in the New Year, we’ll support you by providing the capability to produce a MiFID-compliant statement of costs and charges at a time, and covering a period, of your choosing. You’ll be able to print the document in real time.

To meet our own responsibilities, in line with TISA guidance, we’re also planning to make an annual statement automatically available to all clients on our platform later in the first quarter of 2019.  We’ll keep you up to date on how and when all of this will happen.

What you need to provide to clients from 3 January 2019

The main objective of the disclosure requirement is for you to help clients understand how much they pay for the retail recommendations they receive. This means a mix of pre-sale and ongoing disclosure:

Upfront: before you provide an investment service you need to detail expected (ex-ante disclosure) costs and charges.

Annual/On-going: if you’ve agreed with your client to provide ongoing advisory services, you’ll need to detail all costs and charges incurred in the previous year, based on their personal circumstances and actually incurred costs (ex-post disclosure). These need to be aggregated and shown as a cash amount and as a percentage.

Ultimately, this means providing the following information:

  • all one-off and ongoing charges, and transaction costs
  • associated with the financial instrument – all one-off and ongoing charges, and transaction costs
  • associated with the investment service – all third party payments received, and the total combined costs of these three categories
  • an illustration that shows the cumulative effect of the overall costs and charges on the return

It’s worth being aware that the requirement to provide a cumulative impact has caused the most head scratching for platforms. The calculation methodology is potentially very complex, pulling together a wide variety of data. It also assumes that all charges are coming from the product, which is not always the case where platforms allow charges to be taken from more tax-efficient sources. In the interests of maximum transparency, we’ve illustrated charges as though they’re coming directly from the product wrapper.

It remains to be seen whether or not these calculations will be consistent and widely available across all platforms on day 1. Experience of RDR and the Platform Rules suggests we’ll still be some way from consistency on industry-wide disclosure.

Finding out as much as you can

To avoid delays, it’s important that you’re clear on when and how you’ll receive client information on your chosen platforms. It’s also worth clarifying whether some of the more complex information will be available – for instance, illustrations on the cumulative effect of overall costs and charges on the return.

Meeting MiFID II rules is a necessary but onerous and evolving process. It will be some time before we all know how successful advisers and platforms have been in grasping their new responsibilities, not only on disclosure but also product governance. There will of course be on-going debate about MiFID II and best practice will emerge.

I’ve mentioned before that it’s also helpful to look beyond the immediate regulatory requirements to consider your value proposition over the longer term – as regulation like MiFID II is a reminder that advice requirements, and the investment solutions and reporting required to fulfil these, are only going to become more complex.

In one of my other blogs, ‘The future of advice’, I also explore what’s driving increased demand and competition in the advice market, and the advice models of the future.

The views expressed in this article are those of the author and not Standard Life Aberdeen. Standard Life Aberdeen accepts no responsibility for advice that may be formulated on the basis of this information.