By Jens Jørgen Holm Møller, independent expert in asset management and business strategy
In my first blog, I focused on the need for a specific 2018 file with realized costs in order to ensure compliance, and at the same time, promote cost efficiency and high quality information to investors. Moreover, I informed that a free utility was available HERE. This blog focuses on issues to consider when distributors and manufacturers work with the 2018 EMT file.
The general rule is that ex post information shall be based on costs incurred and shall be provided on a personalized basis. Be aware that ESMA requires a rather detailed personalized ex-post information in their Q&A: “For calculating the total costs during the year (in which the costs of the fund are taken into account), first of all the holding period of the fund is needed. The firm will have insight in this. Secondly, an investment firm has to have annualized information on ongoing realized costs and charges with regard to the financial instrument.” On that basis investment firms need to consider the following issues:
B: Annualized realized costs for the products need to be collected by distributors according to the definitions in MiFID II. The ordinary EMT reporting focuses on anticipated costs and cannot be used for the ex post reporting. Distributors need specific information on realized costs for 2018 in order to comply with the MiFID obligation; hence, the manufacturers must produce and distribute a specific year-end EMT file with realized costs for 2018. The template contains:
- One-off costs for 2018: ESMA notes that the distributor has to account for these, based on the actual costs paid by the clients. The EMT data can only be used in the ex post context if they are identical to the clients’ actual costs.
- Ongoing costs for 2018: In general, manufacturers must report an annualized realized cost in the EMT, which will be correct for all clients that have had the same number of fund shares throughout 2018. For clients that have changed their holdings this solution it will also be correct unless the fund in question has changed costs during the year. The annualized 2018 reporting will be far better though than using the latest ordinary EMT that is valid only at the end of 2018.
- Transaction costs for 2018: Based on the realized costs in 2018.
- Performance fees for 2018: Based on the realized performance for 2018
Standards for the use of templates
- Does an EMT file with a reporting date of 28 December constitute an end of year file? Alternatively, will a new EMT with a reporting date of 15 January replace it? Distributors can solve the challenge of identifying the actual end-of year file for 2018, if manufacturers report in a specific 2018 EMT file. If no end of year reporting has taken place yet, no file with costs and charges for 2018 will be available for the given product, and the distributors will be unable to perform their regulatory obligations
- If manufacturers report their year-end EMT for the 2018 reporting in the same file in which they report their ongoing EMT updates, new EMT data received on 31 January may override the 2018 information, if this has been provided at an earlier date, for example on 8 January. This challenge again calls for specific 2018 EMT reporting.
- If a manufacturer uses a given fund in a fund of funds structure, it is even more important for the underlying funds to report the 2018 EMT file early to the market.
By Jens Jørgen Holm Møller, independent expert in asset management and business strategy
New Year 2019 is approaching and for the first time investment firms shall provide annual ex-post information about all costs and charges to their clients according to MiFID II. The Fund Data Infrastructure FundConnect, has asked me to create a number of blogs in order to inspire distributors and asset managers to consider relevant issues related to the supply and demand for data for the end of year reporting. I hope that such discussions will support the ongoing standardization efforts and industry practices regarding exchange of data and thereby promote cost efficiency as well as high quality information to investors, while facilitating high levels of compliance on the part of the distributors.
According to ESMA, distributors must provide information at least annually. As MiFID II took effect on the 3rd of January 2018, the reporting period begins at that date and most distributors are expected to let the first Ex-Post statements cover the 12 months in 2018. Table 1 gives an overview of the requirements.
Table1: Overview of obligation to provide ex-post information on costs and charges to clients
|Which products||Financial instruments that the firms have recommended or marketed or where they have provided the KID/KIID to the client|
|Which clients||Clients to whom the firms have or have had an ongoing relationship during the year.|
|What information||All costs and charges related to the financial instrument(s) as well as investment and ancillary service(s). Information shall be given both as a cash amount and as a percentage.|
|How specific information||Information shall be based on costs incurred and shall be provided on a personalized basis|
|When to inform||Annually as a minimum for a 12 month period. Can be the calendar year or another period. Reporting should be done as early as possible|
The Regulation and ESMA foresees that distributors should liaise with the manufacturer (e.g. the fund manager) to obtain information on costs and charges of the financial instruments. In order to standardize the exchange of data between manufacturers and MiFID firms and support efficient solutions a European Working Group across financial sectors (EWG) has created a MiFID template (EMT). This is already about to become “the standard” for data exchange.
The need for a specific 2018 file
So far, manufacturers have reported a new EMT file when expenses change. In most systems for data vendors and distributors the new EMT overrides the former one and only the newest is accessible. This covers the needs for the so-called ex-ante reporting but it creates challenges for distributors in the ex post reporting:
- Manufacturers report data at different times, so how can firms see, whether and when the EMT file is final and contains all realized data for 2018?
- How can firms ensure that all relevant manufacturers update the EMT file with realized data from 2018 and not another period?
- How can manufacturers ensure that all relevant distributors report the same realized 2018 costs for a given product to their clients?
- How can firms be certain that subsequent changes to the EMT for the ex-ante reporting do not contain changes in the 2018 information?
According to ESMA, distributors need specific and rather detailed information on realized costs for 2018 in order to comply with the MiFID obligation. Hence, manufacturers and distributors need a specific 2018 EMT file with realized costs.
In order to overcome these challenges, FundConnect’s PRIIPsHub division, among others, offers a free utility “Free Year-End EMT Ecosystem” Service for 2018. This solution for fund managers and fund distributors provides the necessary data to be compliant with the requirements in MiFID II.
In my opinion, the creation of the EMT is very valuable for the industry and for clients; however, it is only a first step. In subsequent blogs, I will describe issues to consider when distributors and manufacturers work with the 2018 EMT file. I will also look in to the need for further development in the sector solutions in order to facilitate the reporting from many different manufacturers across borders to many distributors all over Europe.
Copenhagen, 6 December 2018
Jens Jørgen Holm Møller
We are happy to announce that FundConnect, through its PRIIPsHub division, is launching a data exchange ecosystem in order for both asset managers and distributors to meet their regulatory needs for Year-End reporting of ex post cost and charges. The PRIIPsHub initiative supports an open and free architecture for Year-End EMT information exchange, providing the pass through of data between any asset managers and any distributor.
The Regulatory Aspects
Under Article 50 of the MiFID II Delegated Regulation, for increasing transparency and allowing the retail investor to understand the overall cost & charges of their investments, distributors of investment products have to report the aggregated cost & charges information to retail investors by the end of April 2019.
The PRIIPsHub EMT Ecosystem
PRIIPsHub currently processes EMT data for close to 100.000 ISINs, from over 350 asset managers, with a downstream network of recipients that includes over 400 distributors.
- Allow any distributor or fund of funds to gain access to your EMT data with End of Year ex-post costs & charge information as part of a bulk delivery containing data from all participating members of our ecosystem.
- Free access in the form of a bulk feed or Look-up Portal to End of Year Ex Post Cost & Charges from over 350 issuers.
- A clean single feed with only Year-End values
- A supplementary compliance feed to distributors’ current source
At the meeting of the European Parliament’s Economic and Monetary Affairs Committee (ECON) on 19 November 2018, a European Commission spokesperson said that they are prepared to accept the proposed time extension on UCITS KIID.
UCITS exemption from the PRIIPs Regulation is currently available until 31 December 2019, but the European Commission statement means that it could be extended to 31 December 2021.