Time flies and the regulation has been in force for over a year already and it seems that many are still trying to fully get to grips with what it all means.
But one thing is certain and that is the consequences of non-compliance can be severe.
The sanctions involved for getting things wrong potentially include having to reverse contacts and put clients back in the position they would have been if they had never contracted in the first place.
And, in the most extreme cases, being barred from the industry.
Many will see the regulations as just another layer of bureaucracy, which costs substantial amounts of time and money to comply with.
While that may be the case; the good news is that, even though a lot of the responsibility falls on advisers, a lot of the work has been picked up by platforms.
The requirements under Mifid II include:
– Ex-ante reports (illustrations) for all clients in a very prescribed format;
– The provision of quarterly transaction statements for all clients;
– The need for an LEI (Legal Entity Identifier) in order to trade ETFs and direct equities; and,
– Reporting 10% drops in portfolio value in any one quarter (perhaps the best example ever seen of closing the door after the horse has bolted and probably triggering exactly the wrong reaction, ie selling out at the bottom of the market!).
These were all introduced at the start of last year and, just as the dust is settling on these features, the first Ex-post (cost and charges) statements are imminently due.
One of the interesting things to come out of our conversations over the year is around who is ultimately responsible for the provision of the various requirements.
For example, the 10% portfolio drop reporting requirement applies to DFM portfolios only, and is ultimately the responsibility of the DFM.
Clearly, with a platform in the middle, it makes absolute sense for the platform to facilitate this for the DFM; however, if the platform fails to perform this service, then the regulatory responsibility still sits with the DFM.
In the UK, platforms have picked up this responsibility and, as Sod’s law would have it, despite this being an event that occurs extremely rarely, it happened in the volatile markets of 2018.
However, as far as we can see, platforms have successfully responded to the challenge of providing the reporting required and also picked up the tab for developing this software.
More than just a pretty picture
Similarly, the provision of the Ex-ante report is also the responsibility of the adviser; and while most, if not all, platforms have some sort of Illustration capability, from a regulatory perspective it is the adviser’s responsibility to provide a compliant report to clients.
While the vast majority of advisers will have been used to providing Illustrations to clients, what some may not be aware of is the very prescriptive nature of the Ex-ante illustration.
It needs to include charges categorised as one off (eg Initial charge) on-going (eg platform charge, on-going intermediary charge), transactional (cost of buying or selling assets) and incidental costs.
Alongside this, there needs to be a breakdown of the individual fund costs in the same categories.
At a high level this is the same as a traditional Illustration, the cost categories and inclusion of fund costs to this level of detail is new.
What is clear is that, while a large number of ‘offshore’ platforms have created new and compliant Illustrations, some have not – either because they are not situated in a jurisdiction that is subject to Mifid II (ie Jersey, Guernsey or Isle of Man) and don’t see the need, even if they are marketing into the EU, or because they haven’t yet got around to implementing these changes.
As stated above, the cost of non-compliance can be severe indeed and much of the work has been picked up by platforms, which is a strong reason to use platforms.
But not all platforms are the same and advisers should be aware of this – and, subsequently, choose their platform provider accordingly.
This article was written for International Adviser by Bill Vasilieff, chief executive of Novia Global.