With fines escalating and amid continuing public distrust of the financial services industry, getting it right with the new requirements under MiFID II to disclose ex-post costs and charges is vital for wealth management firms. Many providers took the easy option, providing a ‘data dump’ and leaving clients to work it out for themselves.

At SEI, we chose instead to collaborate with firms, industry experts and the regulators themselves to deliver a robust, innovative and future-proof solution with scalability built-in.

The challenge

Following the resounding success of our MiFID II transaction reporting project, both we and our clients were keen to follow a similar collaborative approach for costs and charges. However, the requirement differed in two key respects, as Mike Feeley, our Director of Proposition Strategy and Solutions Design, explains:

“For the transaction reporting project, we had an existing service, which we were able to enhance for MiFID II. For costs and charges, we had nothing comparable, so it was a very different starting point.”

Secondly, while transaction reporting was all about delivering information to the regulator to highly prescriptive requirements, costs and charges presented a looser framework, which firms needed to interpret to deliver clear information directly to their investment clients. A collaborative approach involving firms, regulators and industry bodies was therefore always going to be key to the project’s success.

415,000 accounts covered under our costs and charges service

A problem shared

As with the Transaction Reporting project, the project team held regular client forums to help firms navigate the complexities of the new regulations. These events aimed to go beyond what other providers were doing, bringing clients together with our own internal and wider industry experts to discuss and develop the best solution in a spirit of true collaboration. Clients had the opportunity to engage with PIMFA Head of Policy Ian Cornwall, TISA Technical Policy Director Jeffrey Mushens and representatives from Morningstar, with experts from Simmons & Simmons LLP also present to contribute legal expertise.

Clients had the opportunity to engage with representatives from PIMFA, TISA, Morningstar and Simmons & Simmons LLP

“A lot of time was spent discussing the rationale,” says Mike. “Why are we doing it? What’s the benefit? Are end clients really going to understand what’s put in front of them?  And is it fair?”

Having followed up with PIMFA and TISA on key questions and settled on the detailed requirement, the project team chose FinoComp as the best partner to develop a service for clients.

FinoComp’s industry expertise and modular, micro services-based approach made them an ideal partner for a project that required creativity, quality and speed to market. Working with a smaller, agile fintech meant that the team was able to quickly develop a solution that could plug into the existing SEI Wealth Platform and be tailored to the needs of individual clients.

The solution

With ongoing input from clients and industry experts via the regular forums, we worked with FinoComp to design a solution that would meet and even surpass identified needs. Key features of the finalised solution included:

  • Seamless integration with the SEI Wealth Platform to source accurate, up-to-date data
  • Daily calculation of costs and charges
  • Ultra-fast calculations without impacting day-to-day processing – enabling rapid development and revision of service
  • The ability to allow firms to customise and specify their own specific rules for the treatment of charges
  • Flexible date ranges to enable reports aligned to specific events e.g. portfolio review meetings
  • API and web portal, providing an interactive, up-to-date view of costs and their impact on performance

Infographic: Costs and charges data

See how the SEI Wealth Platform helps turn complex datasets into easily manageable output for clients

Testing and adding value

Given the flexibility offered to clients and the vast amounts of data involved, the implementation stage required three full-time testers, plus a supporting team of an additional four people working through to the deadline in April 2019.

Among the few incidents during testing, one client raised an issue with missing transaction data, which had been truncated during the import process. The problem was rectified across the firm’s 32,000 client accounts within one business day. Within 48 hours, a deeper validation had been carried out across all client firms’ accounts, with no further issues identified a testament both to the diligence and thoroughness of the project team and our ability to scale rapidly across the full breadth of our client base, providing timely, measured responses to incidents.

“The problem with truncated data was rectified across the firm’s 32,000 accounts within one business day.”

Adding value: Write me a letter…

Many elements of MiFID II’s requirements in relation to costs and charges were open to interpretation; none more so than the provision of a cover letter and disclaimer. In theory, responsibility for writing the letter and disclaimer fell to clients; however, some firms were keen for more support. While we were unable to tell businesses what to write, we were in a position to provide some useful advice.

“We had a team of three technical people loading in all the cover letters and disclaimers, so they had the benefit of an informed view on which ones worked best,” says Mike. “That meant we were able to give clients informal feedback on things like grammar, or additional things they might want to include, or even challenging where we thought there were questions about whether a non-expert would understand.”

20bn calculations required to create the documentation

The outcome

With testing completed, all our client firms were able to meet the April 2019 deadline and deliver standalone reports on costs and charges to customers that were compliant with the regulations. In line with MiFID II’s stated aims, end customers were able to enjoy complete transparency regarding how their costs and charges had been calculated. Client feedback post-implementation overwhelmingly highlighted our attention to each firm’s individual needs, as well as the clear benefits of SEI working with a variety of partners to deliver the most effective solution.

To bring home the level of business and information flow required to make this happen, we provided around 190,000 PDF statements covering approximately 415,000 accounts, which required a total of about 20 billion calculations to complete!

“An awful lot of time was spent on basic maths,” comments Mike. “Costs and charges is all about understanding percentages well and knowing how you present that information effectively.”

The efficiency gains for client firms have been significant initial forecasting indicated an average of five full-time employees would be needed for each firm to implement a suitable solution individually. For firms partnering with us, an average of two part-time employees were required. There were no additional costs for these firms, with the service being offered to SEI Wealth Platform clients on a complimentary basis.

“For firms to implement their own solution, five full-time employees were forecast to be required; firms partnering with SEI on average needed only two part-time employees.”

Seamless integration with the SEI Wealth Platform ensured accurate data – not only on the costs and charges taken, but on their impact on investment performance. What’s more, the scalability of the service means that as the number of accounts on the SEI Wealth Platform increases, the service will be immediately available to all clients from day one. It’s another example of the benefits associated with becoming part of our community of firms.

Future plans

Having successfully delivered the first batch of reports for clients, Mike and the team barely took a breath before starting to work on improvements to the service. The first refinement was to integrate costs and charges into clients’ periodic reports as a single document.

Print and post can be very expensive when you’re doing it en masse, so for some of our firms, that represents a saving of tens of thousands of pounds per year,” says Mike.

The development team is also working on improvements to how data can be interrogated and extracted. For example, the introduction of flexible date range functionality will enable the generation of reports based on specified date ranges, rather than a fixed 12 months.

190,000 PDF statements for standalone report delivery

Be prepared

In a 'Dear CEO' letter sent to wealth managers in June 2019, the FCA specifically flagged costs and charges as an area of concern. Having reviewed the ex-ante costs and charges disclosures of a sample of 50 firms, the regulator pointed to flaws in the system, with firms interpreting the rules in a wide variety of ways. It also flagged a range of intelligibility issues due to insufficient or inaccurate disclosure and hinted at further reviews in the future.

In light of this, it is highly likely that the regulations themselves will be refined to be more prescriptive in the future. Meanwhile, with the honeymoon period over, the point at which the regulator starts ‘setting an example’ by taking punitive action against the worst offenders draws closer. For firms who have yet to properly grasp the nettle, it’s therefore vital to fully engage with the requirements now.

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The views and opinions in this article are of SEI only and are not in any way at all attributed to the regulator. These views and opinions are subject to change. They should not be construed as investment advice.