A few months on and a reasonably reliable and representative picture is emerging on the true impact of the Markets in Financial Instruments II (MiFID II). Contrary to some fears, markets did not crash, firms did not fold, and there were no headline regulatory failures. That’s not to say there weren’t teething problems around high-profile aspects such as transaction reporting, but in the main, the more public ones have been manageable and firms and regulators have worked sensibly and practically around them. No doubt more stories will emerge during this first year, maybe even involving some regulatory action. In addition there are a few hotspots that the FCA is taking particular interest in early on, and one that affects wealth managers is cost disclosure. Another area that is developing slowly, but will grow in importance, is product governance.
It is clear from the many ex-ante illustrations that are now available from firms that it is a very mixed bag. The FCA was asked by firms and trade bodies for guidance and sample templates for these disclosures but declined for various reasons, probably on the grounds it was too early to have in mind a determinative final ‘product’. In the longer run that may be the best strategy, ie, let firms come to market with ideas and then move forward by way of guidance and best practice. In the meantime the short term has been marked by the striking lack of consistency. Those seen by the author range from very simple, single line disclosures to those providing detailed breakdown of costs over longer periods of time, with growth rates illustrated varying from nothing to 7% and beyond. There is also some uncertainty around what costs are included, with disparity between firms over aspects such as ‘slippage’ costs. Given one of the main benefits to the end client is supposed to be the ability to compare costs across firms, this is clearly not working. With ex-post costs also due to be given to clients early next year, the FCA will hopefully provide direction on this sooner rather than later.
One part of MiFID II that was expected to develop more slowly, and which is proving the case, is product governance. The requirements around this are neatly encapsulated in the PROD Sourcebook, though product manufacturers and distributors are feeling their way through this over an extended period of time. One of the primary reasons for this is the continuing work surrounding the European MiFID template (EMT) and more recently the European feedback template (EFT). The EMT is a standardised table of information about a product (also containing the cost data) which details the target market, ie, who the manufacturer considers it is intended for. There are a number of points to consider, ranging from product technical information to investor type to client needs. As target market is a lesser test than suitability, the latter largely overrides the former considerations and this is acknowledged within the template itself. However, discretionary fund managers and advisers cannot ignore certain parts, in particular client type, knowledge and experience, and negative target market. A product ending up in the hands of a client that the EMT data specifically excludes is likely to prove problematic, especially in the event of a complaint, and firms should think carefully before doing so. Completion and understanding of EMT data is still settling down and the next stage will be the standardised data flows between distributors, manufacturers and the FCA. This maturing process is likely to continue well into 2019.
Views expressed in this article are those of the author alone and do not necessarily represent the views of the CISI.