The advent of MiFID II last January brought about a number of changes and developments. In this article, I will not delve into the detailed requirements and obligations arising from this regulation. My aim rather is to provide a different perspective for investors who might question the significance of MiFID II and its impact on them. So the focus of this article will be on reporting to clients.
If one had to zoom in on the reporting aspect of this regulation, one notices that MiFID II builds on the requirements of the original MiFID which already necessitated the provision of various reports and statements to clients in a durable format. With the introduction of MiFID II, the reporting has been extended to include ‘periodic communications’, taking into account the complexity and type of the financial instruments involved as well as the nature of the service being provided to the client.
The reporting of holdings should occur at quarterly intervals as a minimum, both for retail and professional clients. In the case of portfolio management, this needs to include all the activities undertaken during the given period as well as the portfolio’s performance, unless the investment firm is sending the investor regular contract notes with detailed rationales that justify the transactions.
It has also been clarified that when an investment services firm has an online valuation system that allows its clients to review their portfolio, and is in a position to prove that the clients access it regularly, the periodic obligations do not apply.
The reporting requirements also oblige portfolio managers to notify clients as soon as their portfolio value drops by 10 per cent from the last reporting period, and in multiples of 10 per cent thereafter. Clients must also be notified when an individual instrument depreciates by 10 per cent from its initial value or in multiples of 10 per cent thereafter, if it includes a position in leveraged financial instruments or contingent liability transactions.
The reporting requirements also oblige portfolio managers to notify clients as soon as their portfolio value drops by 10 per cent from the last reporting period
Reporting should be undertaken on an instrument-by-instrument basis, unless otherwise agreed upon with the client, and should take place no later than the end of the business day on which the threshold is exceeded, or, in a case where the threshold is exceeded on a non-business day, the close of the next business day.
Statements of holdings in respect of services other than portfolio management are to be provided at least on a quarterly basis or at closer intervals if so requested by the client. Statements must clearly distinguish between those assets that are subject to client asset protection and those that are not.
The statements must also disclose the market or estimated value of the instruments, clearly indicating that the absence of a market price is likely to indicate lack of liquidity. Where an estimate is to be provided, firms are obliged to do this on a ‘best effort’ basis. Statements must also indicate whether there are any assets that have a security interest over them.
This article aims to make this aspect of MiFID II a more digestible matter for those affected. Regulation has increased with the declared aim being that of protecting the investor. The increased regulation does have a price tag though – more paperwork and signatures, among others. That said, this ‘price tag’ has to be viewed in the context of an overarching objective – that of always striving to obtain positive outcomes for customers.
Aldo Scardino is the executive head at BOV Wealth Management.