MiFiD II - What Is It?
The Markets In Financial Instruments Directive (Mifid ii) came into effect in January 2018. This is the cornerstone of EU regulation of financial markets with the aim of promoting the integration, competitiveness and efficiency of EU financial markets. It attempts to achieve this through improving market transparency for a broad range of asset classes.
As far as our clients are concerned, the main changes relate to ISAs and Collectives (Investment Portfolios) and are as follows:-
- A report will need to be provided on the suitability of the investment before you are able to make the investment.
- For each fund recommended, a new Key Information Document (KID) will need to be provided which explains what the fund is and its aims, what the risks are, what you could get back after 1, 3 and 5 years on four bases (a) a stress scenario, (b) an unfavourable scenario, (c) a moderate scenario and (d) a favourable scenario.
- The KID will also disclose costs of investing through a Reduction in Yield (RIY) which shows the impact of the total costs you pay on your investment, and then break down the impact of the different types of costs (one-off costs, ongoing costs, incidental costs). These costs must include all costs associated with the fund such as stamp duty costs and research costs which hitherto have not had to be disclosed. It is important to recognise that these are not new charges but a more transparent way of showing all charges.
- We shall also need to provide periodically a breakdown of all costs within your investment plan split between the provider costs, our adviser costs and the fund costs.
- Providers such as platforms will need to provide quarterly reports on your investments rather than 6 monthly as at present.
- Where fund switches are suggested, a cost/benefit analysis needs to be reported to you before a switch can occur.
- We shall need to report to you at least annually why we think the investment is still suitable for you.
- Providers and advisers will need to provide target market assessments for the plans being recommended – who the plan is or is not suitable for. Clearly the aim here is to ensure that the plan remains compatible with your needs and objectives.
There are many other requirements and the above is a summary only. The big change you will see is the paperwork – the quarterly reports, the KIDs, the pre-information on investments and fund switches. Although burdensome, the aims of the additional details are to provide greater transparency and understanding of the investment before you enter into it.