On 13 September 2017, JWG held their third Client Management Special Interest Group (CMS), with attendees from over a dozen buy-side, sell-side and technology firms meeting to discuss existing issues on cost and charges disclosure under MiFID II and PRIIPs obligations. The meeting was a productive one, whereby participants expressed concerns on the following areas:
- The definition of “all costs and charges” to be disclosed as per the relevant obligation – focusing particularly on the breakdown of more opaque costs, such as implicit transaction costs
- The standardisation of the client disclosure report
- The application of the PRIIPs methodology to MiFID II cost and charges disclosure requirements
- The progress of their implementation process.
Whilst it was encouraging to see member firms taking a proactive, collaborative approach to the clarification of these pain-points, admittedly, a lot more work has to be done. Member firms divulged how they are currently taking all the necessary steps and devoting all the appropriate resources to facilitate operational change as required by MiFID II and PRIIPs obligations, but they also acknowledged that further guidance is needed from all parties involved. With this in mind, firms will essentially take a best-efforts approach to compliance, and will review their progress in accordance with further guidance from the regulators (e.g., thematic reviews) later on in the year.
Their justification pertains to a lack in regulatory clarity from the authorities with regard to certain obligations under costs and charges disclosure. An example is the specific clause on “limited disclosure” as required under Delegated Regulation Article 50 (1), which, during CMS, stood out as being particularly open to misspecification.
The regulation states that “investment firms providing investment services to professional clients and/or eligible counterparties shall have the right to agree to a limited application of the detailed requirements” set out under all relevant cost and charges obligations. Firms can agree to this provision if the following exemptions are not met: in the case of a professional client (i) the service includes investment advice or portfolio management; or (ii) the financial instruments concerned embed a derivative (regardless of the service being provided); or, in the case of an eligible counterparty, (i) the financial instruments concerned embed a derivative; and (ii) the eligible counterparty intends to offer them to its clients.
The question relates to how broadly the clause can be applied, keeping in the mind the overarching goal of the regulation – increased market transparency. For instance, if a firm is engaged in the reception and transmission of orders on behalf of a professional client for equity instruments, it technically falls within the scope of Article 50 (1), and can limit the disclosure of all costs and charges to its clients. In this case, should the total costs disclosed include, for example, all the cost components of the total price (all fees, commission, costs and tax to be paid via the intermediary) or certain individual elements which make up the total costs … or should these be excluded all together? The regulator has provided very little guidance on this and has essentially given firms the legal mandate to limit disclosure to whatever degree they deem fit when providing these services to professional firms or eligible counterparties.
When discussing these issues during CMS, firms once again agreed to take a best efforts approach to limited disclosure. In situations where a legal mandate for limited disclosure exists, firms would essentially come to a formal agreement with their clients to determine the extent to which the disclosure of costs and charges can be limited. Whether this sits well with the regulatory authorities is yet to be seen.
JWG are here to help
This collaborative approach to solving regulatory implementation gaps is taken in all our special interest groups (SIGs), with our fourth Client Management Special Interest Group (CMS 4) due to be held during October 2017. Member firms will continue to consult on best practices related to client services, particularly on issues related to Anti-Money Laundering (AML).
We are always keen to hear from market participants with expertise in client management services. Please contact email@example.com you would like to get involved. You can also keep up to date with client management related news on our LinkedIn Group or follow us on Twitter and subscribe to our newsletter alerts.