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Industry Players React to FCA Concerns Around MiFID II and PRIIPs Disclosure Requirements

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The Financial Conduct Authority (FCA) last week published key findings from a supervisory project to assess the effectiveness of disclosure by asset managers and intermediaries on the back of MiFID II and PRIIPs reforms – warning against non-compliance for asset managers failing to disclose all associated costs and charges. However, the findings have provoked strong reactions from the industry, with players citing high costs and substantial data burdens.

The FCA review was prompted by new disclosure requirements on costs and charges introduced by MiFID II and the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs), both of which came into effect in January 2018.

MiFID II made substantial changes to investor protection rules, requiring investment firm to inform clients about the total costs of the investment services and the financial instruments. The regulation also stipulates a wide range of additional cost disclosure requirements, which apply to professional investors and eligible counterparties.

PRIIPS is aimed at protecting retail investors aims, requiring providers to produce a Key Information Document (KID) to increase the transparency and comparability of investment products and make it easier for retail investors to understand and compare key features and costs. It applies to all PRIIPs products and services purchased by European retail investors, regardless of their nationality; and is applicable worldwide, no matter where the product is purchased.

“MiFID II and PRIIPs brought enormous change to how firms operate and the information they are required to give their customers. While awareness of the rules appears good, we found that firms take inconsistent approaches, risking confusion for customers, who may be misled about how much they are being charged,” warned FCA CEO Andrew Bailey in the latest findings.

The FCA review identified problems with the way some asset managers calculate transaction costs and how prominently they disclose them. It also found that asset managers generally do not disclose all associated costs and charges and where full disclosures are made, inconsistencies between documents and website mean consumers can find the information difficult to understand.

However, industry players cite enormous data requirements and regulatory upgrades in order to meet the new reporting requirements, which have made compliance harder for many firms.

“Collating the vast swarms of data required to enable full disclosure of costs was never going to be a piece of cake. Though the FCA is right to call out any inaccurate calculations and data inconsistencies, addressing the problem is easier said than done for any asset manager trading complex derivatives,” says Peter Rippon, CEO of derivatives analytics software provider OpenGamma.

“The problem is that reporting the cost of trading less liquid, over the counter (OTC) derivatives is a much bigger challenge than reporting on a simple cash equity. There is simply not enough price information available to easily work out a fair mid-price. Trying to get a handle on these previously hidden costs is what makes disclosing fees to the level required such a headache.”

Alex Dorfmann, Senior Product Manager for Financial Information at SIX, adds: “The problem is that in the run up to MiFID II and PRIIPs, too many financial institutions adopted a ‘do whatever it takes regardless of the cost’ approach just to keep the prying eye of the regulators away. These FCA findings prove this approach is simply not sustainable, and that firms need to adopt longer-term thinking when it comes to compliance.”

For those firms that can achieve compliance, however, the benefits could be substantial. Effective analysis of price information will not only provide the information the FCA is demanding, but could also unlock information that increases buying power with counterparties, ultimately pushing down trading costs.

“With both rules requiring overlapping sets of data, firms need to clean up the information silos scattered across the business, and consolidate their approach. Be under no illusions, as the FCA and others begin to shift their focus from demanding data consistency to seeking data quality, the industry can ill afford to neglect a reassessment of their compliance approach. Especially with the continuing pressure to be more cost efficient and automate manual processes,” urges Dorfmann.

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