Andrew Bailey, the chief executive of the UK's Financial Conduct Authority, has come in for some opprobrium for his organisation's reluctance to force financial firms to obey the European Union's second Markets in Financial Instruments Directive. In an appearence before the Parliamentary Treasury Select Committee last week he admitted that he had not taken 'enforcement action' in any cases, even though non-compliance is rife.

Bailey told a conference in June: "Our supervisors have begun work to analyse how costs and charges disclosure reforms are working in practice and we will publish a report for input next month to explore the scale of the potential problems." This, however, has not led to widespread compliance in the last few months. Gina Miller, the co-founder of the online wealth management firm of SCM Direct, has constantly pilloried the regulator in the intervening time, accusing it of being an 'industry lapdog' and failing in its statutory duty to enforce compliance. As long ago as February last year, according to her website, she released a dossier about investment firms that were breaking the rules. Others have since joined the chorus.

Bailey's interchange with his interrogators was as follows.

Chair: Let me start with MiFID II and compliance with it, because last June we discussed it at an appearance you made before the committee and you said you were prioritising supervision to achieve compliance. What is your assessment of how well firms have adapted to the MiFID II requirements?
Bailey: We have done supervisory work. We are fairly shortly going to be coming out with the conclusions and we are going to publish something on this.
Chair: What does 'shortly' mean?
Bailey: I mean a month or two. We have three things going on here. The first piece of work, which we have done, is on costs and charges. That is probably the most relevant one, in a sense, to the discussions that have been had in public. Then we will do work this year on new product governance and research unbundling, where there has also been an issue as to how that works. All that work is a product of our supervisory work as to how effective the application of MiFID II has been.
Chair: Would we then expect to see enforcement action? Are we expecting to see enforcement action?
Bailey: If we find things that meet the test, yes; if we do not, no.
Chair: Is there enforcement action in train? Are there any cases?
Bailey: Not at the moment, no. We have been focused on supervisory action.

At the beginning of the month, many experts vented their frustration about the slowness of progress. One commentator who wrote in to Compliance Matters was Chris Turnbull, the co-founder of ERIC, the Electronic Research Interchange. He opined: “With the MiFID II regulation now reaching its first birthday, it is interesting to look back at a year that many thought would bring substantial change for the asset management industry. With regards to the unbundling of research, asset managers were expected to become more transparent and reveal both their research costs and how they are paying for them, but many pre-MiFID II behaviours, such as deciding on the value of research after consuming it, have not changed.

“It is easy to see this as a disappointment and ultimately a signal of MiFID II’s struggles, but things are starting to move in the right direction. In hindsight it may have been naïve to expect quick-fire change from an industry that has operated in a certain way for decades. A mitigating factor has been that the FCA has not been active enough in enforcing penalties and facilitating the transition. Firms have been given free reign, so it is unsurprising that some haven’t acted in the spirit of the regulation. The overwhelming majority of firms were unprepared for the changes last January, and the state of confusion continued throughout the year.

“We must now accept that achieving an effective research market will be a slow process, as we are very much in the infancy stage at this point. It could take five years for the regulation and implications of MiFID II to finally bed down across the industry, so we have a long way to go.”

The disclosure of costs and charges

Although MiFID II first came into force in January last year, this month is the first time when firms have to report their costs and charges to clients in accordance with its rules. This second iteration will require every platform and advisor to provide each client with an annual breakdown/summary of the actual costs and charges that he has incurred over the last 12 months by April 2019 at the latest. In the case of a client who invested his money before 3 January 2018, the first ex-post statement should cover the period between 3 January 2018 and the selected reporting month.

With this in mind, Andrew Watson, the Head of Regulatory Change at JHC, told Compliance Matters: “The issue of costs and charges disclosure is causing concern among wealth managers, as this January will be the first time they are obligated to report. Wealth managers...will now need to provide a personalised disclosure to the end investor, including the costs and charges applied within investment products. This will inevitably result in questions from retail customers who have never had oversight of these charges and might be unhappy to see 'new' fees. For the first time, investors will see charges expressed as a percentage of their portfolio and may [ask] wealth managers to justify high costs and charges during times of lower performance. Savvy wealth managers can use this as an opportunity to explain to their clients the value of the investment portfolios they offer. Additionally, the right technology will be key for helping them to give their clients a transparent and personalised view of their costs and charges.”