Supporting advisers to meet MiFID II regulations

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For intermediary and adviser use only 

 

The Markets in Financial Instruments Directive (MiFID) II - along with the Markets in Financial Investments Regulation (MiFIR) – came into force on 3 January 2018. Any firms and individuals buying or selling ‘financial instruments’ must comply.

Here’s a summary of the changes we’ve made to be compliant with MiFID II. 

What is the Markets in Financial Instruments Directive (MiFID) II?

MiFID was introduced in the UK in 2007 to facilitate cross-border investments and introduce common consumer protection within the European Union (EU). It’s responsible for setting a framework of EU legislation for:

  • investment intermediaries that provide services to clients around listed securities (for example, shares, investment trusts, exchange traded funds (ETFs)), bonds and units in collective investment schemes – collectively known as financial instruments, and
  • the organised trading of financial instruments.

It affects firms directly involved in securities trading and investment management. It also affects firms distributing products such as ISAs, general investment accounts (GIA) and self-invested personal pensions (SIPPs), which allow investment into shares, investment trusts, bonds and UCITs.

MiFID II’s provisions for investor protection will directly affect advisory firms and intermediaries who advise clients, or enable clients to transact in listed securities.

Why not have a look at 'Our approach to MiFID II' for more information. 

You can read the FCA consultation papers, policy statements and user guides at www.fca.org.uk/markets/mifid-ii

Our approach to MiFID II

There are several key areas that impact Aegon and how we work with you and your responsibilities as financial advisers. We’ve been working with advisers, discretionary fund managers (DFMs) and fund managers over 2017 to ensure we were ready for the new regulations which came into force on 3 January 2018. 

Best execution

Best execution is an important part of MiFID II. The obligation to achieve best execution is in Article 27 of MiFID II, which states that an investment firm must take all sufficient steps to obtain the best possible result for its client when executing a client order.

We’ve produced a new Order execution policy summary and updated our full Order execution policy in line with the MiFID II regulations. You can find them in our document library

Legal Entity Identifiers (LEIs) and Natural Persons Unique Identifier

From 3 January we won’t be able to process any trades for equities, investments trusts or ETFs unless we have certain unique identifiers. These identifiers apply for the buyer/seller and the person who makes the investment decision on an investment transaction.

Please note that although European Securities Markets Authority (ESMA) has delayed this requirement by 6 months, we’ll still require the LEI.

If you transact with us on a discretionary mandate on behalf of your clients on these listed securities, we’ll have written to you to ask for your LEI. This could be your firm, branch, or network adviser’s LEI.

We’ll have also written to you to provide details of your clients who buy and sell these listed securities. This will be their Natural Persons Unique Identifier (NPUI) which will involve capturing their nationality (including both where dual nationality exists) and the country of nationalities additional unique identifier such as their National Insurance number, passport number or their LEI if they aren’t a private individual. 

Further details on LEI’s can be found at www.fca.org.uk/markets/mifid-ii/legal-entity-identifier-lei-update and in the FCA's Legal Identify Identifier: what you need to do leaflet.

As we already carry out transaction reporting to the Financial Conduct Authority, this won’t change. We’ll still continue to do this.  

Product governance and target market

The funds you make available to your customers are changing in two ways. Firstly through a requirement to define a ‘target market’ and secondly through the identification of ‘complex investments’.

What is a target market?

Under MiFID II there will be a common view of what target market means for fund managers, but in essence it’s a description of the types of people and their characteristics who are targeted for each financial instrument.  Distributors will also need to define their target market. 

When fund managers define their target market, they’ll also need to set out the types of clients outside of the target market. Again, distributors will need to do this when determining their target market for customers.

What are complex investments?

Fund managers will identify if the characteristics of their investments requires evidence of a higher level of understanding of the associated risks for non-advised customers, through an ‘appropriateness test’. This test assesses their level of knowledge and experience of investing and whether the investment is appropriate.

  • We won’t be making complex investments available to non-advised clients.
  • Advised clients aren’t affected by this rule, as the usual suitability requirements will apply.

As a consequence of the changes, some customers won’t be able to trade in certain investments and existing customers won’t be able to top-up or switch into those investments in the future. However, customers can continue to hold or sell these investments if required.

We’re working with fund managers to identify complex investments and to receive target market data, which we’ll be able to share with advisers. We’ll provide further updates as this work progresses.

Costs and charges disclosure

We’re producing the relevant disclosures for pre-sale and post-sale costs and charges information.

Pre-sales disclosure

We’ll continue to provide personal illustrations for our products and in addition provide a charges summary of MiFID impacted investments. This summary will show the aggregated product costs for example, the fund manager costs that a customer will incur investing in a MiFID impacted investment. It will also include a summary of the service costs they’ll incur in holding those funds in their product with us for example, our charges and any adviser/intermediary charges facilitated through the product.

The product and service costs will also be broken down into the respective itemised costs as required by MiFID, these include aggregated one-off costs and ongoing costs and will be displayed in £s and % as required.

Post-sales disclosure

We currently provide clients with a six monthly statements. Under MiFID II this will change and for clients invested in ISA, GIA or have non-insured assets in our SIPP, we’ll be issuing statements on a quarterly basis. 

We’ll continue to include a yearly statement of their portfolio valuation and a list of all transactions over the previous 12 months.

Client reporting

Under MiFID II, investment firms providing the service of discretionary portfolio management must provide their client with quarterly portfolio management statements.

They’ll also need to inform the client where the overall value of the portfolio, relative to the value at the beginning of each reporting period, depreciates by 10% and thereafter at multiples of 10%. This should be no later than the end of the business day in which the 10% loss has happened or, in a case where the loss is on a non-business day, the close of the next business day. 

If you work with a DFM you need to understand how they’ll notify you of a 10% drop and also whether they intend to provide you with supporting information as to the reason why, to allow you to advise and support your clients.

Although the responsibility lies with firms providing discretionary portfolio management services, we’re working with our discretionary fund managers (DFM) partners and platform suppliers to provide reporting capability to you which will allow you to notify your clients should such a loss occur.

Key considerations for advisers and intermediaries

Here’s an overview of some of the key business changes you should be considering.

1. Review your business model 

  • Independent advice: Consider the change in definition of 'independent' and whether this affects your business.
  • Target market: Define a distribution strategy, your target market and ensure you have governance arrangements in place to monitor this. You should ensure funds and instruments are sold in line with your target market (including fund target market), as this information will be fed back to fund managers.
  • Staff training: Train staff to required competency standards under MiFID II.
  • Telephone and electronic monitoring and recording: Put in place appropriate telephone recording for customer calls and electronic communications with regard to trades, or alternative arrangements if your firm falls under Article 3.
  • Governance, inducements and conflicts of interest: Update governance and policies in line with MiFID II to cover inducements, conflicts of interest, understand inducement changes and consider how this will affect your business.

2. Client advice and notification

  • Suitability: Align suitability reports to MiFID II standards. These need to be produced even where a hold position is being advised to clients.
  • Pre-sale illustrations: Issue pre-sale illustrations either through an online or offline journey. It’s your responsibility to ensure your client has this pre-sale information.
  • Fund costs: Understand and explain what implicit fund costs are to customers
  • Costs and charges: Be prepared to discuss costs and charges more with your clients providing full disclosure of all fees and charges relating to the transaction.
  • Quarterly statements: Ensure customers are aware that going forward they may receive quarterly statements.
  • Access to funds: As a result of complexity and target market changes under MiFID II, some customers may not be able to top up or buy investments that they have previously had access to. Advisers and intermediaries will need to explain this to customers.

3. Trading

  • Legal Entity Identifiers (LEIs): If trading in listed securities (for example, equities, investment trusts, and exchange traded funds and units in collective schemes), advisers and intermediaries will require a LEI. Customers trading in these products without an adviser will need to provide their NPUI and some companies and trusts may also need to provide a LEI.
  • Marketing monitoring: Firms will need to monitor their target market on an ongoing basis and provide board level oversight.
  • Sales outside the target market: If investments are sold outside of the target market, the fund manager may request further information from the adviser or intermediary to understand why.
  • 10% market fall: Firms who provide discretionary portfolio management services, will need to notify advisers when investments fall by more than 10%. If advisers work with a discretionary fund manager they need to agree how information about a greater than 10% fall in the market will be confirmed and shared withclients as appropriate. We’re working with our DFM partners and suppliers to provide reporting capability to you which will allow you to notify your clients.
  • Best execution policy:  You’ll need to be aware of our Order execution policy when trading. We’ve updated our Order execution policy and it’s available in our document library.

MiFID II – Your questions answered

Here’s a summary of the most frequently asked questions we’ve received.

Transaction reporting, Legal Identity Identifiers and Natural Person Unique Identifier

What is transaction reporting?

A transaction report is a data set submitted by us which contains information relating to a transaction. Each transaction report includes information about the financial instrument traded, the firm undertaking the trade, the trade counter party, the person on whose behalf the firm has dealt (where applicable) and the date/time of the trade. This is reported back to the Financial Conduct Authority (FCA). 

Will you be changing transaction reporting?

No, this won’t change. We’ll continue to carry out transaction reporting for financial instruments traded as before.

Will Aegon continue to be responsible for best execution?

Yes, Aegon continues to be responsible for best execution. Best execution is an important part of the Markets in Financial Instruments Directive II (MiFID II). The obligation to achieve best execution is in Article 27 of the MiFID II Directive, which states that an investment firm must take all sufficient steps to obtain the best possible result for its client when executing a client order.

We’ve produced a new Order execution policy summary and updated our full Order execution policy in line with the MiFID II regulations. You can find them in our document library.

Will you require us to provide a Legal Entity Identifier (LEI)? 

If you trade with us in insured funds, collectives you don’t need to do anything.

However, from the 3 January we won’t be able to process any trades for listed securities including equities, investment trusts or exchange-traded funds unless we have certain unique identifiers. These identifiers apply for the buyer/seller and the person who makes the investment decision – Decision Makers – on an investment transaction.

Please note that although European Securities Markets Authority (ESMA) has delayed this requirement by 6 months, we’ll still require the LEI to continue to trade.

If you transact with us on behalf of your clients (discretionary mandate) on these listed securities and you’re responsible for making the investment decision on their behalf, we’ll have written to you to provide an active LEI. This could be your firm, branch, or network adviser’s LEI.

We’ve also asked you to provide additional information relating to those clients who buy and sell these types of securities. This could include:

  • their Natural Persons Unique Identifier (NPUI) if they’re a private individual, which will involve capturing their nationality (including where dual nationality exists) and the unique identifier specific to their country, such as national insurance number or passport number;
  • their LEI if they aren’t a private individual (may apply to some companies or trusts);
  • if the client is on a discretionary or advisory mandate, and
  • whether they have a Power of Attorney or Power of Representation making investing decisions on their behalf.

If you don’t currently transact with us in listed securities but intend to in the future, we’ll gather the identifiers during our on boarding process.

What about trusts, companies and charities?

If a client who is a legal entity or structure, including a company charity or trust, they’ll need to make arrangements to obtain an LEI code if they want a firm to continue to act on their instructions or make a decision to trade in listed securities on their behalf.

Further details on LEI’s can be found at www.fca.org.uk/markets/mifid-ii/legal-entity-identifier-lei-update and in the FCA's Legal Identify Identifier: what you need to do  leaflet.

Costs and charges disclosure

Will you be making changes to costs and charges disclosure?

We’ll continue to provide current illustrations for all our products. Where MiFID II investments are chosen, we’ll provide a MiFID charges summary. This summary will show the aggregated product costs for example the fund manager costs, that a customer will incur investing in a MiFID investment. It will also include a summary of the service costs they’ll incur in holding those investments in their product with us, for example our charges and any adviser/intermediary charges facilitated through the product.

The product and service costs will also be broken down into the respective itemised costs as required by MiFID, for example aggregated one-off costs and ongoing costs and will be displayed in £s and % as required.

Will my clients be receiving more detailed statements, more often?

From 2018 we’ll issue statements quarterly to customers, where appropriate. On a yearly basis we will also include information on costs and charges incurred during the year, the impact of those charges on the investment return and transactions for that period.  

How does MiFID II impact on any model portfolios I have set up?

Investment into, and rebalances of Model portfolios will remain an advised transaction so you’ll need to provide costs and charges disclosure to your clients.

Complex investments and appropriateness tests

Will you be restricting funds available on platform?

Non-advised clients won’t be able to trade in complex investments. Existing customers with a holding in a restricted fund won’t be affected, however they won’t be able to top-up or switch into those investments in the future. We won’t be making complex investments available to non-advised clients.

Advised clients aren’t affected by this, the usual suitability requirements will apply.

What investments will you be defining as complex?

Fund managers will identify if the characteristics of their investments requires evidence of a higher level of understanding of the associated risks for non-advised customers, through an ‘appropriateness test’. This test assesses their level of knowledge and experience of investing and whether the investment is appropriate.

Of the 6,000+ instruments on the platform, fund managers have indicated that only 300 of these aren’t suitable for Retail Investors. You might want to consider communicating with any non-advised clients who hold complex investments to discuss their options.

Will you be offering an appropriateness test?

We won’t be offering an appropriate test as we are an intermediated B2B provider. For customers who haven’t been given financial advice about investing in complex funds, an appropriateness test will be required. This test assesses their level of knowledge and experience of investing and whether the fund is appropriate. This means that non-advised clients won’t be able to trade complex funds, and whereas existing customers won’t be affected, they won’t be able to top-up or switch into those funds in the future.

Client reporting

 How will you help us to notify clients of a 10% market fall?

Although the responsibility lies with firms providing discretionary portfolio management services, we’re working with our DFM partners and platform suppliers to provide reporting capability to you which will allow you to notify your clients should such a loss occur. 

Product governance and target market

What is target market?

Under MiFID II there’ll be a common view of what target market means for fund managers. But in essence it’s a description of the types of people and their characteristics who are targeted for each financial instrument. Distributors will also need to define their target market.

When fund managers define their target market, they’ll also need to set out the types of clients who are outside of the target market. Distributors will also need to do this and we’ll provide further updates as this work progresses.

What extra information / reporting do you expect to receive from us as advisers about target market?

We’ll report aggregated sales in the funds held on platform back to the manufacturer (Fund Manager). This will include the new MiFID II required attributes – however, if you believe you’re selling a fund(s) outside of target market then you should report this to us or directly back to the manufacturer.