MiFID II Ex-Post Costs & Charges: A Wakeup Call for the Industry

The summer of 2017 was not a typical calm and quiet holiday season for compliance teams in Europe. Scheduled to commence at the end of the year, PRIIPs KID morphed into a storm that relentlessly battered those who were preparing their institutions to comply with the new regulation.

This summer things appear much calmer, but dark clouds are gathering overhead. The industry consensus is that the first MiFID II Ex-Post Costs & Charges report will be due during Q1 2019. However, the industry is dangerously underprepared for the storm that is coming, in particular, when compared to the level of readiness displayed by industry participants for PRIIPs KID at this time last year.

As any distributor knows, retrieving charges and commissions (so called “service-related costs”) from your own internal systems is difficult enough. Combining that with the costs embedded within the financial products themselves (the so called “product-related costs”), making the information available in both money and percentage terms, and then customizing the report on a per client basis poses an even greater challenge.

Moreover, preparing for MiFID II Ex-Post Costs & Charges requires an understanding of the different methods used by different industry participants to calculate relevant costs and then aggregating them in a consistent manner. For instance, the fund industry and the exchange traded products industry have different concepts regarding ex-post costs which need to be understood and accounted for when combining them into a single cost report.

At this point you might be asking yourself, what about the European MiFID Template (EMT)? Shouldn’t that alleviate much of the difficulties? Sure, the intention of the EMT is great, namely, to standardize the communication between manufacturers and distributors, including costs and charges information. However, although many manufacturers are doing well on their ex-ante costs and charges reporting requirements, most are still not reporting ex-post costs. Additionally, user experience with the template has revealed some shortcomings with the original format.  To overcome this, EMT ‘Version 2’ has been drafted but not yet approved by industry associations. In all likelihood, by the time the first annual ex-post report will be required, distributors will find themselves grappling with two versions of the same report. So much for alleviating much of the difficulty…

Your next question might be, “But there’s still the regulatory hubs, right? Surely the technology they are offering can help us overcome the challenges?” Of course, the hubs are a powerful tool, but they rely on the manufacturers to supply the correct data and do not include logic to track erroneous information. Moreover, the lack of standardization in reporting protocols between the hubs means the distributor will need to deal with multiple formats.

Still, all of the above could be implemented in an orderly way if manufacturers were already providing the ex-post cost information. However, many are still not providing the data, and lots of problems exist with the ex-post data that is provided. Interestingly, even the problems themselves are not consistent between the different manufacturers. Each manufacturer has a different understanding of what is required thus resulting in a spaghetti of different results.

We don’t want to ruin your summer, but once it’s over, the industry needs to start acting  and make a major push to prepare for the coming storm. Now is the time for taking the initiative and finalizing the reporting standards and formats, clarify ambiguities, and demand the highest level of detail and commitment. And in light of the 2019 Q1 deadline fast approaching, how can the industry afford anything less?

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