As we start the new year, wealth managers face the next leg of Mifid II regulation, with a three-month deadline to disclose more detailed breakdowns of their charges to clients for the first time.
The bad news is that confusion continues to reign, as no template has been provided for firms to follow.
Linda Gibson, director of regulatory change and compliance risk at BNY Mellon’s Pershing, describes this aspect as the ‘known unknown for Mifid II in 2019’.
‘We still don’t have a template for the ex-post costs and charges disclosures due in the first quarter and the focus for firms should be on evidencing and explaining how a decision has been reached in compiling these statements.
‘It’s not going to be static disclosure, and the expectation is that it will need to be improved and enhanced over time,’ she explained.
Mifid II came into force on 3 January 2018, affecting different parts of the financial services value chain – namely, banks, asset managers, traders and brokers. At their core, the rules aim to improve the way that investment firms and advisers communicate with their customers about performance and fees.
Andrew Watson, head of regulatory change at JHC, suspects that the disclosure of total costs and charges applied within underlying investment products will spark questions from clients who will view these charges as ‘new’.
‘For the first time, investors will see charges expressed as a percentage of their portfolio and may increasingly look for wealth managers to justify high costs and charges during times of lower performance,’ he added.
Charlotte Ransom (pictured above), chief executive of online investment manager Netwealth, goes as far as describing ex-post costs disclosure as ‘a transformational moment’. In her opinion, it will see traditional wealth managers forced to provide the ‘eye-watering truth of their all-in fees’.
One year on
While the repercussions of cost disclosure are yet to be felt, one year on, there is one part of the market where the impact of Mifid II is already evident. The unbundling of research and trading costs has resulted in less research coverage of small caps, which in turn has caused liquidity to decrease in this part of the market.
‘During periods of market volatility – such as the correction seen in “Red October” in 2018 – it makes it more difficult for traders and investors to unwind positions in what was previously a more liquid market, causing wider spreads and greater price swings,’ said Pershing’s head of trading, Michael Horan.
Likewise, investment managers are now required to notify clients within 24 hours if their portfolio falls by 10% or more.
The arrival of this new rule has proved timely. Following a disappointing year for markets across the globe, some firms will have been forced to send out letters to clients, delivering the bad news.
As we kick off 2019, Pershing’s Gibson suspects the Financial Conduct Authority’s (FCA) post-implementation reviews of transaction reporting and best execution will loom large. She adds that a lack of clarity on what constitutes best execution is likely to represent a headache for some firms.
Deloitte’s six regulatory themes of 2019
From new regulations to ongoing supervision
‘2019 will see a shift away from regulatory reform and policy initiatives, with regulators and supervisors looking to assess how new regulations have been implemented. Firms will need to ensure that regulations have been suitably embedded and optimise their approaches where possible.’
Preparing for Brexit
‘Firms will lack certainty over the UK’s withdrawal from the EU. Any agreement is likely to be ratified at the last moment. In the meantime, firms should continue to prepare for a no-deal Brexit.’
The introduction of Ibor
‘Pressure for Ibor to transition away from Libor will grow, with greater supervisory scrutiny of whether firms are reducing their exposure to Libor. More immediately, firms will also need to prepare for a transition away from both Eonia and, possibly, Euribor.’
Climate change and sustainability
‘Global, EU and national regulators are in the process of defining their expectations for climate change risk management. Amid rising investor pressure and industry action, central banks and regulators will increasingly focus on the financial risks that arise from climate change and expect firms to work towards managing them.’
Building resilience to operational disruptions
‘Increasing exposure to IT and cyber risks will see regulators scale up their activity on operational resilience in 2019. Firms will need to show they understand their risk exposures and have the capability to deal with any potential disruptions.’
Value for money
‘Conduct regulators are increasingly emphasising the economic consequences of poor-value products and services on customers. They will continue to focus on companies’ fees and charges and the transparency and comparability of products. They will expect firms to apply clear and fair charging structures.’
Source: Deloitte’s 10 years on from the crisis: Financial Markets Regulatory Outlook 2019.