Recommendation No. 1/2020 of 7 May 2020

Recommendation on how to comply with ex post reporting requirements of costs and charges related to the provision of investment and ancillary services

1. BACKGROUND

The MiFID II matrix framework requires disclosure transparency from intermediaries on the costs and charges related to the provision of investment and ancillary services. This is to ensure that investors are aware of all the costs and charges of evaluating investments, including with a view to comparing financial instruments and services.

The reference regulatory framework on this matter, applicable from the beginning of 2018, is represented by:

- article 21, paragraph 1, of Legislative Decree 58/1998 (hereinafter the “Consolidated Law on Finance"), and article 25-bis of the same decree, which refers to it;

- article 36, paragraphs 1, 2, letter d) and 3, of Regulation no. 20307/2018 issued by Consob on 15 February 2018 (hereinafter "the Intermediaries’ Regulation"), which refers to the relevant provisions of Delegated Regulation (EU) 2017/565 (hereinafter "the Delegated Regulation").

On this subject, as of 16 December 2016, ESMA has published "Questions & Answers on MiFID II and MiFIR investor protection topics"which, in Section 9 "Information on costs and charges", has addressed some specific aspects (hereinafter "Q&A").

On 28 February 2019, Consob published warning notice no. 2 on compliance with the rules on disclosing information on costs and charges related to the provision of investment services.

2. RECOMMENDATION

Considering the usefulness of aligning intermediaries’ ways of complying with the requirements on disclosure transparency on costs and charges related to the provision of investment and ancillary services, taking into account the specific nature of the domestic market, which features the presence of significant distribution activity aimed at investors classified as retail, Consob makes the following recommendations for the ex postreporting of costs and charges incurred by customers.

These recommendations, which stem from the general principle that all information addressed to customers should be "correct, clear and not misleading", are aimed at allowing:

- prompt identification, within the documents transmitted, of the disclosureon costs and charges, in all aspects considered relevant by the legislator;

- understanding the meaning of the items described;

- valuation of the actual impact of the items considered;

- reconciliation of the items described in the analytical disclosures with those in the aggregate disclosures;

- comparison of the documents received from different intermediaries.

1.1. Scope of application

The following recommendations are aimed at intermediaries, as defined in article 35, paragraph 1, letter b), of the Intermediaries’ Regulation[1], as well as independent financial advisors and financial advice companies as defined in articles 18-bis and 18-ter of the Consolidated Law on Finance[2] and at managers who market their own and/or third party units or shares of UCITS[3] (hereinafter "intermediaries").

Although they mainly concern situations in which ex post reporting of costs and charges is done to retail customers, these recommendations are also applicable to professional customers and qualified counterparties, taking into account the provisions of article 50 of the Delegated Regulation.

So by virtue of the provisions of article 74, paragraphs 1 and 2, of the Intermediaries’ Regulation, as from the commercial catalogue’s definition phase, Intermediaries shall take all reasonable steps to be in a position to acquire all necessary information from producers, even if they do not fall within the scope of MiFID II, to adequately understand and know the instruments they intend to recommend or sell. If intermediaries are not in a position to obtain sufficient information to assess the main features and risks of financial instruments, they should avoid giving advice on that instrument or selling it, as also clarified in the ESMA Guidelines "on product governance obligations under MiFID II" of 5 February 2018[4].

Producers are invited to make the necessary data and information promptly available to the addressees of this Recommendation to enable them to fulfil the relevant disclosure requirements prescribed by the legislation.

1.2. Content of the recommendations

A) Structure and content of aggregated disclosure

(i) Reporting on costs and charges should be done alternatively:

- with a stand-alone document, which can be submitted at the same time as other documents (such as the periodic management report or the financial instruments report), from which it must be physically separate;

- within a document of wider content, in a section placed on the first page (or the one immediately following the title page and index), with appropriate graphic highlighting, through a suitable and specific title in bold type and without further information or promotional messages appearing in the same section.

(ii) Aggregate disclosure of costs and charges should be done, separately for the portfolio management services and the other services, through the use of the table set out by ESMA in its Q&A No 13 in the document “ Questions and Answers on MiFID II and MiFIR investor protection and intermediaries topics“, in the “ Information on costs and charges“ section, as set out below:

The individual components to be included in the items are those indicated in Annex II of the Delegated Regulation.

The item relating to costs and charges for financial instruments should show the implicit ones included in the price separately (such as structuring fees).

At the bottom of the table, the amount of tax charges included in "Total costs and charges” should be shown, both in absolute values and in percentage terms.

The costs and charges shown in the table are those actually incurred by the customer during the reporting period covered.

(iii) In representing the percentage amount of costs and charges, the parameter taken as a reference (such as for example "average stock") should be consistent with the level of aggregation of costs and charges used. So therefore, when reporting costs and charges for portfolio management services, reference should be made, for example, to the "average stock" of solely the managed portfolio; for other services, the parameter should be for example the "average stock" of the managed securities portfolio (without considering bank account availability).

(iv) An illustration of the cumulative effect of costs on return should be clearly identifiable at the end of the table. Intermediaries should also indicate gross and net returns.

(v) The table should be accompanied by a summary explanation of the meaning of each cost item. In addition, an explanation should be provided of the criteria used to determine the percentage value of costs and charges and/or their impact on return (such as, for example, the "average stock" or the "notional value of the transaction"), with an indication of the reference amount used in the calculation.

B) Relationship between aggregated and analytical disclosures

(vi) Intermediaries should place investors in a condition to be able to reconcile the items set out in the analytical disclosure (if requested by the client) and the aggregated disclosure, both in terms of monetary and percentage values. In the event reconciliation of percentage values is not possible, the intermediary should give specific warning of this circumstance, explaining the reasons.

C) Timing of submission of ex post reporting

(vii) Intermediaries should submit reports for the calendar year by April of the year following the reporting year, in order to enable clients to appreciate the costs and their impact on returns at a date as close as possible to making decisions on the invested assets.

In the event of interim reports, they should be sent by the end of the period following the reporting period (e.g. in case of quarterly reports the one for the first quarter will be sent by the following June, in case of monthly reports the one for January will be sent by February).

(viii) If, in addition to the annual report on costs and charges, the intermediary also provides an interim report, same should make it clear to the client that the annual amount may not coincide, in absolute and/or percentage values, with the sum of the amounts shown in the interim intervals, giving a summary account of the reasons for this.

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The reports for 2019, where not yet sent, given the current healthcare emergency situation, should be sent to clients as soon as possible, in accordance with the general principle that information addressed to clients "must be correct, clear and not misleading" and in compliance with current legislation.

THE CHAIRMAN
Paolo Savona

[1] This includes "SIMs, including companies referred to in article 60, paragraph 4 of Legislative Decree 415 of 1996, Italian banks authorised to provide investment services and activities, asset management companies authorised to provide portfolio management services, investment advice and services for receipt and transmission of orders, EU management companies that provide portfolio management services and investment advice by means of branches established in Italy, EU AIFMs with branches in Italy that provide portfolio management services, investment advice and services for receipt and transmission of orders, EU investment firms and banks with branches in Italy, as well as third country firms authorised to provide investment services and activities in Italy. “Authorised intermediaries“ or “intermediaries“ are also understood to mean stockbrokers, financial intermediaries enrolled on the register envisaged under article 106 of the Consolidated Law on Banking, the company Poste Italiane - Divisione Servizi di Banco Posta authorised pursuant to article 2 of Presidential Decree no. 144 of 14 March 2001, limited to the provision of investment services and activities for which they are authorised“.

[2] The rules on costs and charges also apply to independent financial advisors as described under article 18-bis of Legislative Decree no. 58/1998 and to financial advice firms as described under article 18-ter of said Legislative Decree no. 58/1998, in accordance with the provisions of the Intermediaries’ Regulation, implementing article 31, paragraph 6, of Legislative Decree no. 58/1998, as amended by article 9, paragraph 1, letter o) of European Delegation Law 2014, no. 114 of 9 July 2015, in compliance with article 3 of MiFID II. Since 1 December 2018, supervisory powers over these parties have been vested in the Financial Advisors' Body, pursuant to article 13, paragraph 1-ter, of Decree Law no. 148 of 16 October 2017, the so-called Tax Decree Law (converted with Law no. 172 of 4 December 2017).

[3] By virtue of the provisions of articles 107 and 109 of the Intermediaries’ Regulation, which extend the MiFID II derived rules on costs and charges to the marketing of own and third party UCITS, as a result of the reference to article 36 of the Intermediaries’ Regulation which, in turn, refers to the relevant provisions of the Delegated Regulation.

[4] In particular, paragraph 63 of the abovementioned Guidelines states that “Where the distributor is not in a position to obtain in any way sufficient information on products manufactured by entities not subject to the MiFID II product governance requirements, the firm would be unable to meet its obligations under MiFID II and, consequently, should refrain from including them in its product assortment.“