ESMA’s final advice to the Commission in this area is little changed from the draft it issued for consultation in May 2014. In particular, the final advice requires the disclosures to be made to all types of clients – retail, professional and eligible counterparties – with little scope for limitation.
All costs and charges down the supply chain, including any costs and charges within the product itself, must be aggregated and disclosed ex ante at the point of sale and ex post at least annually. Firms may provide separate figures for the aggregated initial costs and charges, aggregated on-going costs and charges, and aggregated exit costs. The disclosures must be made both as a cash amount and as a percentage.
On an ex ante basis, this will require a number of costs and charges to be estimated. Either incurred costs may be used as a proxy or the firm must make “reasonable estimations”, adjusting its assumptions in the light of actual experience. Firms are also required to provide clients with an illustration showing the cumulative effect of costs on return. This will require further assumptions to be made about the likely return of the product, on which the advice provides no detailed guidance.
ESMA notes the industry’s concerns about overlaps and disconnect with the UCITS KIID and the development of the PRIIP KID, work on which is running to a different timetable and is to be subject to consumer testing. It defers to the Commission to resolve how these inconsistencies are to be addressed. Also, it recommends that the Commission review the requirements of the UCITS KIID (which does not include disclosure of underlying transaction costs) and that in the meantime distributors should seek this information from the fund manager.
ESMA also notes that insights on consumer behavior and on the way that consumers process information should be taken into account in order to design effective disclosure. However, unlike for the PRIIP KID, the MiFID Level 2 process does not necessitate consumer testing and the timetable is too tight to allow for it.
Despite the lack of detailed rules or guidance on methodologies, especially in relation to assumptions used to calculate ex ante disclosures, it is essential that firms – whether distributors or product manufactures – begin to plan for implementation of these requirements. Data may need to be imported from different systems and departments within the firm; arrangements will need to be made to receive necessary data from other firms involved in the supply chain and to pass information on to the next firm in the chain; an internal process for agreeing necessary assumptions needs to be established; and the format of the disclosures need to agreed.