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MIFID II: A Q&A with Alistair Wilson

25 March 2020

Almost two years since the roll-out of MiFID II, Zurich’s head of platform strategy Alistair Wilson examines its wider impact on providers and advisers, and why Zurich was so quick to meet its demands…

Business men meeting

An upgrade on the original Markets in Financial Instruments Directive, known as MiFID II, arrived more than two years ago, on 3 January 2018. It was a significant piece of legislation, affording greater protections to investors.

It was also complex and far-reaching, and presented a great – if not unwelcome – challenge to the financial services industry, from financial advisers to fund managers to platform operators.

Now that the industry has had time to meet the requirements of MiFID II, how is it broadly coping? And what difference is it making to investors? Alistair Wilson has the answers…

Overall, is MiFID II achieving its primary objective of strengthening investor protection?

AW: Protection comes in various shapes and sizes. MiFID II is helping consumers see what they are paying, which in turn should help them assess whether they are getting value for money. Over time it may even help them see how much an ‘average’ investment solution could cost, so they can spot high charges. But MiFID II doesn’t address the need to take action – this bit is still missing I think.

MiFID II is not just about costs, of course. It also provides a mechanism for letting investors know when their portfolios fall by 10% or more in a quarter, when their money is managed on a discretionary basis on their behalf. There is no protection here, in my view, even if it could sway some to switch to alternative funds to ‘protect’ their investment. Advised clients benefit from professional oversight, while direct investors could be vulnerable to knee-jerk reactions.

The introduction of quarterly valuations is another feature of MiFID II, but they are fairly blunt instruments as many investors had decent access to valuations already. Does information qualify as protection? Maybe, as long as investors continue to consider their investments and the term they are invested for.

What were the main asks of financial advisers?

AW: Depending on their advice model, MiFID II meant different things. All distributors – including platforms and advisers – were required to disclose the total costs a client has paid over a 12-month period, at least once a year. But this doesn’t cover all products. For example, pensions are excluded which I believe stunts what MiFID II can achieve, and which is why we include pensions in our disclosures.

The challenge for advisers is wading through and assessing the alternative ways platforms in particular are presenting this information. Creating a consistent level of disclosure for their clients must be a painful and time consuming exercise.

For example, some providers do not disclose pounds and pence upfront, though it must be available to clients upon request. Isn’t it simpler to just provide it at the beginning?

When it comes to disclosing any retained interest, again the platform market is doing itself no favours as many do not include it. It is a charge after all, and in my opinion aggravates public mistrust of financial institutions.

What did Zurich do, and when, to make sure it was compliant?

AW: We recognised a number of the challenges facing advisers. For those using discretionary managers, we knew client information was not provided to the DFM by us – the platform – or by the adviser. We do hold the information so we took it upon ourselves to close the loop.

It requires constant monitoring and a strong process to identify when DFM portfolio values drop 10% and to let affected clients know within 24 hours. If that 10% threshold is reached, we notify all impacted clients on behalf of advisers. I still believe it is appropriate for advisers to follow up with those clients. And as before, we are monitoring ISAs, investment accounts, pensions and any junior suite assets. It would be strange for us just to write out about ISAs or GIAs when the bulk of clients’ assets could typically be managed on a discretionary basis within a pension arrangement.

We have also provided advisers with a quick and easy way to create their own 12-month costs and charges summary for clients, which is helpful for an annual review, and helps advisers keep control of their own costs and remain compliant.

Is the requirement to notify investors when there has been a 10% drop in their portfolio value working?

AW: That depends on who is tasked with the notification. Where investors have a platform that has grasped the responsibility, it appears to be working fine. When a DFM has to provide notification, and it doesn’t necessarily have clients’ contact details, notification is being given to advisers and therefore not getting to the end investor unless the adviser firm steps in. And in order for the adviser to meet the 24 hour deadline, DFMs therefore need to provide advisers with early notification. This appears to be a messier process and exposes adviser firms to additional regulatory risk and cost.

Does the rule over disclosure of costs and charges go far enough?

AW: In the main, yes. The challenge remains though about what is disclosed up front and what is disclosed 12 months on. With some platform fee structures based on pay-as-you-go, those clients undergoing regular adjustments to their portfolios or receiving income may see a difference between the costs disclosed upfront and those actually deducted and replayed 12 months on. This could lead to some interesting questions from investors.

What is ex-post disclosure and how has it been affecting advisers?

AW: Ex-post disclosure is a replay of the actual costs and charges an investors has paid over the last 12 months for their ISA and general investments. This appears to be a fairly straightforward requirement but the calculations can be fairly complex and difficult for advisers assessing platform fees with pinpoint accuracy. It appears not every cost is being taken into account, especially when interest is retained by the provider.

Understandably, advisers wish to provide clients with information that is relevant to them and time appropriate. Where platforms are not providing an adhoc solution for advisers this appears to be done on a ‘best endeavours’ basis.

There is no doubt ex-post disclosure is adding to adviser workloads. Advisers may also be having interesting conversations with their clients when the pre-sale illustration may vary significantly from the ex-post disclosure as a result of the number of ancillary fees that can come into play with platforms.