Mifid II’s impact on adviser platforms

Under the requirements of Mifid II, the onus on platforms will increase, in terms of the administrative burdens of disclosure of risk, remuneration and assets, as well as carry out enhanced reporting.

As early as January this year, discretionary management services were warning that platforms without proper, robust systems in place for managing this administration and fee disclosure could be in for a tough time when Mifid II comes into force.

However, costs and charges will mean platform fees come under the spotlight. Heather Hopkins, head of Platforum, explains: “Clients will have a clearer view than ever before of all costs and charges, including the investments.”

She says while the Retail Distribution Review ushered in greater transparency about adviser and platform charges, it can still be “difficult” for clients to figure out what they are paying, so Mifid II should make this clearer. 

However, there is another potential outcome from the increased disclosure on costs and charges: it could make investors more picky about what they pay for. 

Platforms are ideally placed to help advisers meet their new Mifid II responsibilities, as much of the data needed resides with the platform itself. Sarah Lyons

Ms Hopkins adds: “The other big difference is that disclosures will have to show the cumulative effect of costs and charges on investment returns. 

“We think increased disclosure, at a time of low growth in financial markets, may make investors more cost-conscious.”

Sarah Lyons, head of marketing at Ascentric, believes platforms can do more to help advisers, particularly where it comes to the adviser having to provide the pre-sale illustrations.

This now has to show estimated costs for the fund, and now the cost of the platform, advice and even the cost of investment research. There will be a need for a post-sale illustration with actual and anticipated costs provided.

Ms Lyons says: “Investors will also need to receive valuations at least quarterly, and an annual statement of costs. On the face of it, this is more work for advisers but platforms are ideally placed to help advisers meet their new Mifid II responsibilities, as much of the data needed resides with the platform itself.” 

Moreover, as Barry Nielson, business development director for Nucleus comments, providers and discretionary fund managers will still have to “ensure their products and services are reaching the right customers” – even if this is via a platform.

“They will have been doing this anyway, but will probably require more information than they do currently on who is buying their products.

“Firms offering non-advised services on complex products will have to check the product is appropriate for the customer, based on their knowledge and experience.”

The 10 per cent drop rule

Under Mifid II, there is a requirement for those running a discretionary managed portfolio to notify clients quarterly every time there is a 10 per cent drop in the value of that portfolio.

This should be done within 24 hours of the drop occurring.

This seems straightforward, but what if that discretionary portfolio has been bought on-platform? Who owns the client? The adviser. Whose job is it to inform the client? The discretionary fund manager (DFM). 

What if the fund has been recommended by an adviser and the client has bought it on platform? Still it is the DFM’s responsibility to inform the client. 

Advisers may not be responsible for notifying the client but they will have to provide up-to-date contact details to allow the DFM to contact the client. This means a third party will have access to adviser’s clients – not a situation with which many advisers will be comfortable.

Therefore, any wealth manager discretionary permissions will need to ensure they have a mechanism in place to track portfolio performance and notify clients of a 10 per cent drop.

This could be difficult because, as reported earlier this year by FTAdviser, DFMs may be following a portfolio model and not the individual client’s actual portfolio – and some divergence in performance may not be picked up.

In FTAdviser in February, Fraser Donaldson, a wealth management analyst at Defaqto, said the delegation of responsibilities must be made clearer across the value chain and suggested a four-way written agreement.

He commented at the time: “There are gaps in the chain and there need to be formal arrangements. There are some propositions where they would write a four-way agreement between platform, client, adviser and DFM but most prefer not seeing the client.”

In this case, the adviser should inform the client – but who informs the adviser? Not all advisers will have in-depth investment monitoring systems to allow this. 

Heather Hopkins, head of Platforum, comments: “We don’t think advisers running models on an advisory basis are on the hook for this communication – although they should check their compliance teams. 

“However, be warned if you are using a DFM to run models on platform, your clients will be notified within 24 hours of a 10 per cent drop in value. 

“You aren’t responsible for the communication – the DFM is – but your clients will no doubt call you immediately.”

It seems like a complex web of communication. What could possibly go wrong? 

Moreover, the rationale behind the rule seems very arbitrary, in that the notification only must be given for a discretionary managed part of a total portfolio. Should the overall portfolio drop 10 per cent, there is no need for a notification. 

In a blog post for platform Nucleus, Phil Young, founder of support service Zero, commented the 10 per cent rule was “nuts”. 

According to Mr Young: “When a model portfolio service is used and run on a platform, the DFM has no idea who the client is, but remains lumbered with the regulatory responsibility for notifying.

“Furthermore, as the notification has to be made the business day that the portfolio breaches the 10 per cent drop, the platform as custodian is the most reliable source for calculating that loss.

“I doubt many advisers would feel comfortable relying on their back office data for that level of consistent, daily accuracy.”

He adds that the platform is the agency most capable of issuing the notification – but it is not the platform’s responsibility. 

Ascentric has been speaking with those advisers with discretionary permissions to make sure the platform has put Transmission Arrangements in place “well before 3 January 2018”.

However, this might not be as problematic as it might seem.

According to a spokesman for Novia, most financial advisers will not be affected “unless they have discretionary permissisons – and very few do”. As with any regulatory change, it is worth checking permissions are up to date.

In addition, although Alistair Wilson, head of retail platform strategy at Zurich UK, says this “might sound onerous”, he says realistically, this might not occur very often.

I doubt many advisers would feel comfortable relying on their back office data for that level of consistent, daily accuracy. Phil Young

Mr Wilson explains: “If the new requirement had been in place for the past five years, a client wholly invested in the FTSE 100 would have been alerted of a 10 per cent drop within a three-month period on only one occasion.

“Going back a little further, there would have been only 25 notifications since the start of 1984, with most of these activated around the 2001-2002 and 2008 financial crises.

“Moreover, a portfolio in the context of Mifid II is the collection of all the assets being managed on a discretionary basis, not an individual fund – unless we are talking about structured funds, which will be assessed individually.”

Other considerations

There is also the need for some advisers with discretionary permissions to have a legal entity identifier (LEI) in place. 

Under Mifid II, a new set of standards for investing in exchange-traded assets or exchange-traded instruments (ETAs or ETIs) are being put in place under new ‘transaction reporting’ rules.

Providers under Mifid II will need to know who is the beneficial owner of an ETI, and who is the decision-maker in respect of the transaction.

This means where advisers are dealing with legal entities, such as trusts, charities or corporates, they will need to have an LEI in place so they can continue trading in ETIs. 

As the Novia spokesman says: “Advisers with client assets held on platform will not be able to trade in ETIs if they do not have an LEI.”

Mr Wilson comments: “Where an adviser doesn’t have discretionary powers, and is acting on behalf of a client, providers are likely to identify them as the adviser’s client.

“Where an adviser does hold discretionary powers in the same way as a DFM, Mifid II requires providers to identify them as the ‘decision maker’ in relation to the trading of ETIs, if they have elected to use those FCA permissions with those clients.”

Again, platforms can help with informing discretionary wealth managers and advisers. 

According to Ms Lyons: “Advisers with discretionary permissions must make sure they have their decision-makers national identifiers available for their first ETI transaction on 3 January, otherwise they won’t be able to trade. 

“Ascentric is making sure advisers know about these essential requirements in advance so there is minimal, if any, disruption to the advice process.” 

Any advisers who do not already have an LEI can get one from the Stock Exchange – for an upfront £115 initial charge and an annual £70, not including VAT.

Which platforms are Mifid II ready?

Although implementation is just a matter of weeks away, Platforum has indicated some players are still not ready, which will have a knock-on effect on advisers using those platforms.

Ms Hopkins states: “The big players are on top of complying with Mifid II but some of the smaller players are pushing back on any support needed by DFMs.

“Some just do not have the resources to support the DFMs on this.”

However, according to Ms Hopkins, those platforms who are offering support to advisers in complying with Mifid II are “differentiating themselves”.

She comments: “We have heard good things about Transact, FundsNetwork and Nucleus in particular.”

As part of its Mifid II planning, Nucleus has teamed up with consultancy Zero Support (launched by Mr Young), to produce a series of action points and information for advisers ahead of the implementation date. 

It has also come up with a list of 10 concise actions. These are: 

1)    Keep a register of conflicts of interest and review at least annually.
2)    Review whether you need further qualifications, training or permission to maintain independent status.
3)    Apply for new permissions by 2 January 2018 if you wish to advise on structured deposits.
4)    Review your recruitment procedures and assess if they need tightening.
5)    Look at your remuneration structure and ensure no incentives negatively impact clients.
6)    Decide which staff the dealing-on-personal-account rule should apply to, and create a record of direct equities they hold.
7)    Decide if you need to apply for a Legal Entity Identifier through the London Stock Exchange.
8)    Establish whether your DFM or platform will offer online reporting access to avoid the need for paper reporting.
9)    Understand whether your DFM or platform will issue the 10 per cent loss notification, and how.
10)  Check your agency agreement with your DFM: where model portfolios are being used, how does the responsibility for regularly checking suitability sit with you as the adviser?

The spokesman for Novia says: “We are not in a position to comment on what other platforms have in place, but as far as Novia is concerned, we are on track for all the changes.”

Allfunds, a pan-European funds platform, has already made a Mifid-II compliant share class analysis tool available for clients, which will provide key product details, and created ways to help support distributors compare and select funds digitally.

Mr Wilson adds: “With platforms developing different solutions for Mifid II, it is essential advisers understand how the platforms they use are planning to respond.

“This may involve advisers re-doing part of their platform due diligence to ensure they are not caught out.”

Simoney Kyriakou is content plus editor of FTAdviser