MiFID II: Disclosure Article 2: Services and Costs

Important Note

This is a summary of detailed analysis that ATEB has undertaken of the disclosure requirements detailed in the MiFID II Policy Statement. Our full analysis will be discussed with ATEB clients as part of our ongoing service arrangements.

This article is one of a series. It is biased towards ‘typical’ ATEB clients. It is a very high-level summary and does not therefore cover every MiFID connotation. It does include our interpretation of the requirements, where there is a lack of clarity, and should therefore be used with discretion and read with a questioning attitude.

All firms should read the Policy Statement.

Accessing the FCA Handbook

We do not replicate FCA rules in this article, but refer to them. The made rules are contained in the annex to the Policy Statement but to access the relevant rules as they will be in their final context, you will need to forward date the FCA handbook. To do this:

• Go to the FCA Handbook provide link ;
• Click on ‘Show Timeline’;
• Select a date well into 2018;
• Access the relevant handbook.

Disclosure of services and costs

Closely resembling the current requirements, appropriate information must be provided to clients, in good time, covering:

• the firm and its services;
• the financial instruments and proposed investment strategies;
• execution venues; and
• all costs and related charges.

The rules require the disclosures to be made in a ‘durable medium’ but otherwise do not prescribe how the disclosures should be made, so several documents may be used; indeed, this is ATEB’s preferred approach, rather than everything crammed into one document. It also better facilitates the rule distinction to provide a charging structure at an early stage in the sales process, and then to separately confirm the actual adviser charge after the client has had time to digest the services and corresponding charging structure. As such, we would suggest a suite of documents, namely:

• proposition document, describing the firm’s services, charging structure and regulatory disclosures;
• initial fee agreement;
• ongoing fee agreement;
• data protection information and client authority (GDPR from May 2018 will require this to be separate from any other client authority – ATEB recommend making this change when docs being reviewed for MiFID II).

This information can be provided in a standardised format.

An important aspect is that the disclosure must be made clearly to allow a potential client sufficient time before committing to a contract or service (hence our preference for separate documents). For example, firms could consider including risk warnings prior to the client committing. A topical example in this respect is defined benefit pension transfers, where a ‘did you know that this carries potentially significant risks’ letter could be issued after the initial analysis, but prior to proceeding with the transaction.

Website disclosure

MiFID II permits disclosures to be made via a website where the following conditions are met:

• the use of a website as the medium for disclosure is appropriate to the context in which the business between the firm and the client is, or is to be, carried on;
• the client must specifically consent to the provision of disclosure information in that form;
• the client must be notified electronically of the address of the website and the place on the website where the information may be accessed;
• the information must be up-to-date;
• information must be accessible continuously by means of that website for such period of time as the client may reasonably need to inspect it.

The firm and its services, all costs and related charges

Most of the disclosures about the firm and its services are similar to existing detailed disclosure requirements of COBS 6.1. The MiFID disclosures, which must be made in good time before the provision of investment services, or ancillary services, to clients or potential clients.

We do not repeat the list of requirements here. Please refer to COBS 6.1ZA to check your current initial disclosure documents against the MiFID requirements.

Information disclosure financial instruments and proposed investment strategies

There are additional requirements specified in COBS 14.3A that firms should note. 

Firms providing portfolio management services

Such firms must make additional disclosures, also in good time before providing the service.

Firms safeguarding financial instruments and holding client money

Such firms must make the additional disclosures, also in good time before providing the service.

Additional disclosure points to note

• firms must provide information on how the client may pay; and
• details of any third-party payments to be itemised separately; and
• an itemised breakdown of the aggregated costs and charges to be provided on request (please see also subsequent ATEB article);
• limited disclosure may be agreed with professional clients, but not where investment advice or portfolio management services to be provided, nor where the instrument embeds a derivative, so this limitation is unlikely to be of practical use;

Illustrations

These must show:

• the effect of overall costs and charges on the return of the investment
• any anticipated spikes or fluctuations in costs
• a description of the illustration.

VAT

This is not a MiFID issue. However, it is again topical. We know that many firms have not revisited their disclosure documents since RDR and it is common knowledge that the FCA continues to find errors with disclosure documents. MiFID II therefore provides the ideal opportunity to review and overhaul your suite of documents.

As such, you should review the description of services so that they are as ‘VAT compliant’ as possible (or should that be ‘non-VAT compliant’?). This is particularly relevant for ongoing services, where descriptions are often non-specific and certainly open to challenge by HMRC.

Key point summary

1. If your current disclosure documents are compliant, then changes should be relatively straightforward. However, it will take time to cross-reference to the relevant rules.
2. ATEB recommends using this exercise as a catalyst to review the disclosure document suite and process.