In Europe, Move Towards Greater Investment Fee Disclosure Revealed

The latest EEC Directive “The Markets in Financial Instruments Directive II” (MiFID II) was passed into law recently and includes proposals for greater disclosure to investors in terms of the range of fees which are charged in the investment industry. It will give consumers a better feel for the true “all in” costs of investing. Today we look at these proposals briefly in the context of MiFID II.

By way of background, the original MiFID directive came into effect in November 2007 and harmonised regulation for investment services across the 31 member states of the European Economic Area (the 28 Member States of the European Union plus Iceland, Norway and Liechtenstein). The main objectives of the Directive are to increase competition and consumer protection in investment services.

The new directive, MiFID II introduces reforms impacting the trading of equities away from public stock markets, competition among derivatives markets and clearing houses, speculation in commodity and commodity derivatives markets, controls on electronic and high-frequency trading and the ability of firms in non-EU countries to offer financial services in the EU.

“MiFID II introduces a market structure framework which closes loopholes and ensures that trading, wherever appropriate, takes place on regulated platforms.

MIFID II increases equity market transparency and for the first time establishes a principle of transparency for non-equity instruments such as bonds and derivatives. Rules have also been established to enhance the effective consolidation and disclosure of trading data. To meet the G20 commitments, MiFID II provides for strengthened supervisory powers and a harmonised position-limits regime for commodity derivatives to improve transparency, support orderly pricing and prevent market abuse.

A new framework will improve conditions for competition in the trading and clearing of financial instruments.

MiFID II will introduce trading controls for algorithmic trading activities which have dramatically increased the speed of trading and can cause systemic risks.

Stronger investor protection is achieved by introducing better organisational requirements, such as client asset protection or product governance, which also strengthen the role of management bodies. The new regime also provides for strengthened conduct rules such as an extended scope for the appropriateness tests and reinforced information to clients. Independent advice is clearly distinguished from non-independent advice and limitations are imposed on the receipt of commissions (inducements).”

According to IFAOnline, “the passing of MiFID II into law has made it compulsory for UK investment firms to disclose the total cost of their investments to their clients. It will require the providers of investment products to present consumers with the total of the costs including adviser cost, product cost, third party cost, transaction cost and everything else that affects the amount returned to investors. The cost will need to be expressed as a single number as well as be disclosed in an ‘understandable format’. Investors will also be able to request an itemised breakdown of all the costs. The changes will need to be implemented by 2016.”

There has been debate between UK pressure groups like True and Fair Campaign and players like The  Investment Management Association (IMA) who represents the UK investment management industry which represents members who manage over £4.5 trillion of assets on behalf of UK and overseas clients. At the heart of the debate is how and what fees should be disclosed. As we highlighted recently the impact of fees on investment performance is crucial.

Total fee transparency is a good thing, even if there are issues about how to translate past data into information which may inform a potential investors decision. We welcome initiatives to help investors make better decisions and raise awareness of the true costs involved.

How transparent are the full range of investment fees in Australia?

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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