There is no point in having a standard way of showing costs and prices in a marketplace if those standards aren’t clear, robust and transparent enough to produce figures that can be fairly compared against each other – that’s the predicament for the investment industry in the early stages of MiFID II.
Thus far there have been numerous complaints in the press and elsewhere (a recent report cited concerns raised from fund house Vanguard and the Investment Association) that the standards for providing the costs and charges information required under the new rules are not being applied in a consistent manner, or that the data is immediately showing anomalies that undermine trust in the new regime. The end result is that end investors could be missing out on the substance promised by MiFID II – a system that allows them to measure investment products for value and suitability. In order to find a solution, it’s important to first outline the problems that we have:
- A flawed methodology? There’s concern that in some applications of the so-called slippage method it can report zero positive costs if securities prices move downwards between investment decision and execution. If some fund managers use this method and others use a method that estimates higher costs, clients may judge a certain investment to be better value on a completely erroneous basis.
- Funds of funds under-reporting transaction costs. Another accusation has been levelled at fund of funds, accusing them of posting lower-than-realistic transactions costs. The issue here seems to be that the transaction data hasn’t been made available immediately to the funds of funds, so that some investors are reading a blank space as a zero cost, something that they could find misleading. We expect the problem to be resolved by the end of the first quarter of 2018.
- We’ve also heard complaints that the cost of funds is much higher than previously advertised – witness a story that some of the UK’s more popular funds are charging much more in fees than had previously been disclosed. However what we have to consider here is that in the past, transaction costs were included in net performance and were not broken out. It’s an apples and oranges situation – the approach taken by some in the market has been to compare the existing fund ongoing costs figures (OCF) with MiFID EMT data, PRIIPs EPT data or indeed measuring MiFID EMT data against PRIIPs EPT data. These are not valid comparisons as each data set is different: the traditional OCF does not include transaction charges while the new MiFID II rules do; at the same time the calculation methodologies for PRIIPs & MiFID II differ. Over the coming months, expect the discussion to move from the shock of the newly exposed costs, to a debate about cost versus value when the data is fully analysed. The Active versus Passive debate will reign throughout 2018.
- The data is changing as we go along. We have noted that data is being tweaked over the first month of MiFID II operations. This is to be expected as people hone their techniques for reporting the information. We expect this to continue for at least the first three months of operation so we will have to expect MiFID II data to be less than accurate in measuring competing fund costs during this period.
Overall, there are several benign factors at work here: issue three comes from a misunderstanding of how data can be measured against previously disclosed figures – we’ll just to need to ensure that when comparing data points they need to come from the same regime. The points raised in bullets two and four are just bedding-down issues that should resolve themselves.
The one issue outstanding is that of a consistent methodology for compiling transaction cost data. This is an area where the regulator needs to step in and give some guidance; otherwise the high expectations for MiFID II will be tarnished from the start, and end clients will be none the wiser about how to invest their money.