MiFID II lays out a number of requirements that serve to re-shape the way in which services are developed, communicated, sold and delivered to clients:

1. Investor Protection: MiFID II introduces enhanced information to clients. Investors are to be provided with clear, relevant information and with products that match their needs and investment objectives. MiFID II introduces heavy restrictions on inducements for independent advisors and portfolio managers (including access to research). MiFID II also refines the product suitability and appropriateness checks for retail clients.
2. Business Conduct, Supervision and Product Scope: MiFID II introduces a new requirement for investment firms to take all appropriate steps to avoid conflicts of interest. Strict rules on fees and commissions are introduced with research unbundled and paid for separately. Regulatory scope is extended to cover structured deposits for investor protection purposes. Regulators will have the ability to ban products or services that threaten investor protection, financial stability or the orderly functioning of markets. Administrative sanctions are strengthened to ensure effectiveness and harmonisation.
3. Re-papering: Client re-categorisation may lead to impacts on client take-on and post transaction paperwork. Pricing, workflow and business conduct adjustments will lead to changes in terms of business, client agreements and confirmations.

The main impact to Pershing and its clients will be client reporting. This includes a number of changes to contract notes, custody statements and portfolio valuation reporting.

• The MiFID II provisions on information to clients, in relation to costs and charges, clarify existing MiFID I provisions and introduce additional disclosure requirements beyond what is currently required

• The rules state that all costs and charges incurred in relation to an investment service and/or ancillary service provided to the client should form part of the amount disclosed

• Costs and charges should be fully disclosed for both ex-ante and ex-post disclosure, including those costs charged by the investment firm itself/other parties to whom the client has been directed, as well as those flowing from the manufacturing and managing of the financial instrument

• Third party payments received by investment firms in connection with the investment service provided to a client shall be regarded as part of the cost of the service provided to the client and identified separately

• Investment firms must provide clients or prospective clients with separate figures including initial costs and charges, ongoing costs and charges, and exit costs

Following the announcement by the FCA and ESMA, not to publish a proposed standardised format for the disclosure of costs and charges, the Tax Incentivised Savings Association (TISA), jointly with the Investment Managers Association (IMA), have responded to the FCA consultation papers and have a Good Practice guide proposal on how costs and charges should be disclosed. This includes a focus on five key cost categories:

1. One-off charges
2. Ongoing costs
3. Transaction costs
4. Ancillary service costs
5. Incidental costs

The FCA re-confirmed in the June policy statement it will not provide a template on costs and charges, as was requested by the industry.

• The existing MiFID I requirement states professional clients must have a written agreement, in a durable medium , with a retail client. This is now extended to include professional clients, except where the service is one-off investment advice where there is no periodic suitability assessment

• Firms must have a written agreement in place where they provide ongoing investment advice and/or custody services to a retail client

• The client agreement should include a description of (i) the types of financial investments that may be purchased/sold (ii) the types of transactions that may be undertaken (iii) any investments/transactions which are prohibited (iv) a description of the main features of any custody services to be provided, including the role of the firm in relation to corporate actions (v) the terms on which securities financing transactions will generate a return for the client

• The content of custody statements will be changed under MiFID II. The statement will now include a market value of assets held based on the last available price

• In addition, Pershing will report assets held based on trade date instead of settlement date. This will avoid confusion for end investors who are likely to be receiving a valuation report at the same time

• It will also include wording indicating that a lack of market value is ‘likely to’ be indicative of a lack of liquidity as set out in the regulation

• Where applicable, the custody statement will include wording to provide a clear indication as to whether or not the assets are protected and whether or not there is any security interest over the asset

• The existing wording will be adapted to reference the change in frequency on which the statements will now be issued

As a custodian, Pershing will be required to provide quarterly custodian statements including the market value of each asset, rather than on an annual basis.

• Firms acting as portfolio managers, who do not provide individual contract notes for transactions, will now be required to provide quarterly valuation reports as opposed to twice a year*

• Firms must report to clients if the overall value of the portfolio at the beginning of the reporting period depreciates by 10% and thereafter by further multiples of 10%

• Firms must also report to their retail clients if their portfolio contains leveraged financial instruments or contingent liability transactions, where the initial value of any of the financial instruments has depreciated by 10%

*Please note: Under ESMA Guidance 25.4.16, in cases where the client “elects” to receive information about executed transactions on a transaction-by-transaction basis, a periodic statement must be provided at least once every 12 months.