On 3 January 2018 MiFID II’s Costs and Charges disclosure was introduced. This asked firms for the first time to present all costs and charges associated with their investment services and activities to end investors.
So, what do you need to report?
MIFID II’s costs and charges disclosure has three key areas:
1. Immediate response to investor cost requests (before the event, also know as ex-ante)
Annualised expected costs must be provided to all prospective investors before they make an investment decision.
2. Reporting costs for the last three years (after the fact, also know as ex-post)
Average annualised costs incurred over the last three years must be provided to each investor on an annual and personalised basis.
3. Reporting the cumulative impact of costs on returns
Costs should be aggregated and expressed both as a monetary amount, and as a percentage of average net asset value (NAV). This should be accompanied by an illustration showing the cumulative impact of costs on return.
1. One-off charges
These are costs that are paid to investment firms at the beginning or end of the provided investment service. Examples include deposit fees, termination fees, and switching costs.
2. Ongoing costs
These are fees paid to investment firms in relation to continual services. Examples include management fees, advisory fees, and custodian fees.
3. Transaction costs
These are all costs related to transactions performed by investment firms. Examples include fund entry/exit charges, broker commissions, foreign exchange fees, and bid-offer spreads.
4. Ancillary charges
Any miscellaneous costs, such as research and custody costs.
5. Incidental costs
Performance-related fees, for example.
Who is impacted?
Despite the disclosure requirements above being directed at MIFIDs, investors are increasingly expecting all investment firms to report their costs and charges. As a result, AIFMs are indirectly affected by this new regulation, even though they are not part of the directive.
So, it’s vital both MIFIDs and AIFMs take practical steps to ensure they keep on the right side of regulators and investors.