Data acquired by regulatory consultancy Bovill shows 1,335 firms notified the FCA they had filed inaccurate reports in the first year of Mifid II. Under the EU directive UK investment firms and trading venues are required to notify the FCA “promptly” where they identify errors or omissions within their transaction reports.
SCM Direct CIO and founding partner Alan Miller (pictured) says the City watchdog’s response to firms that have run afoul of the rules around costs and charges disclosure is evidence of “a complete breakdown in the FCA regulatory enforcement function”. “We drafted the text for Article 24 Mifid II so we are well aware of the law that the FCA and the industry are happy to ignore”.
Miller and his wife, fellow SCM Direct co-founder Gina Miller, have put in numerous FOI requests to the City watchdog and threatened legal action against the regulator for failing to go after investment managers that are not following the rules. “Numerous firms are either intentionally or unintentionally ignoring or breaking the rules designed to provide consumers with proper fee transparency,” says Miller. “Many firms and platforms have admitted they will not be providing clients with the annual statement required in law.”
Association of Professional Fund Investors (APFI) advisory board member and Transparency Taskforce ambassador Sunil Chadda echoed Miller’s comments, describing the “complete lack of enforcement by the FCA on rules which came in January 2018”. “I have never seen anything like this before in my life.”
There is no excuse for investment firms not getting their costs right, according to Clive Waller managing director of CWC Research, who says the situation “has not been helped by a weak regulator”. “Charges are costs of business and if they can’t work out costs of business, they wouldn’t be able to work out their profit and pay their huge bonuses.”
Reporting errors the tip of the iceberg
Bovill managing consultant Damon Batten believes that raft of firms that failed to follow the rules correctly in 2018 are just the tip of the iceberg and that thousands more could be blissfully unaware they have made an error.
“At this point it’s unlikely there are that many firms who have zero errors because it [Mifid II] is new and it is complex,” he says.
Batten says the most common error he comes across is firms over-reporting or under-reporting. Mifid II significantly broadened the scope of the previous transaction reporting regime under Mifid to include additional asset classes like commodities, FX and interest rate derivatives.
Portfolio Adviser understands that 27% of the 1,300-odd firms that filed inaccurate reports last year had errors stemming from under-reporting, while 73% of errors stemmed from “erroneous content”.
The FCA does not keep data on over-reporting, where an investment firm attempts to report a transaction on a non-reportable financial instrument. The Market Data Processor flags such transaction reports as pending in the regulator’s database and if the instrument is not available in seven working days the transaction report is rejected.
‘Turkeys unlikely to vote for Christmas’
Batten thinks the regulator could be doing more to educate the industry by publishing more guidelines or FAQ’s that highlight common reporting mistakes.
“The FCA has the expectation that firms are doing their own checking and making sure their reporting is accurate but it would be useful for these firms as part of that commitment to understand where the common pitfalls are.”
But Waller thinks there is a fundamental issue with the regulator expecting to get impartial feedback from the industry “instead of employing people who know how the industry works”. “Turkeys are unlikely to vote for Christmas. The asset management review and (pointless) platform review have taken so long that many who started the projects have moved on or gone.”
Quoting compliance expert Richard Hobbs, he says, “The trouble with the FCA is that they do not know what they know.”
Until the confusion is cleared up Chadda says that fund management firms who correctly disclose their costs find themselves at a “serious disadvantage” as they look more expensive relative to the competition.
“This is an existential issue for many people ethical firms who are doing it all properly,” he says, while “the consumer doesn’t know the reality, unfortunately”.