MiFID II & IDD Disclosure FAQ

What are the Insurance Distribution Directive rules for initial disclosure?

Under the Insurance Distribution Directive (IDD), both product providers and intermediaries carrying on insurance distribution activities for Insurance Based Investment Products (IBIPs) are required to initially and periodically provide details of product/fund costs and charges and distribution costs and charges.

These disclosure rules within the IDD were not intended to be as strict as MiFID II – they differ to reflect the differences between holding a direct financial instrument versus within in an insurance wrapper.

Consequently, the FCA has confirmed that the initial disclosure of product and fund costs & charges for an IBIP are adequately met by the provision of a Key Information Document (KID)/Investment Options Document (IOD).

It’s worth remembering  though, that the KID/IOD does not include details of ‘distribution costs’ e.g. advice charges, an initial platform charge etc. So you will still need to provide this information separately.

When considering your clients’ long term information needs, you’ll also need to consider what other information they’ll need , based on their individual circumstances and their investment portfolio. This may mean adding additional information about the market conditions, performance, and so on.

What are the requirements for costs & charges disclosure for personal pensions?

The FCA are still maintaining existing standards of disclosure for personal pensions, which already require you to provide general and specific information on all costs and associated charges. Personal pensions (non-IBIPs) are technically in scope of the IDD, although the FCA has made it clear that the focus of IDD is on IBIPs.  

We know some platform providers are showing annual cost and charge disclosure for pensions in the same way they report on ISA and unwrapped investments. However, this is likely to be necessary as they support multiple wrappers. For our current SIPP proposition, Retirement Account, all reporting is in line with the current pension regulations.

What are the Insurance Distribution Directive rules for periodic disclosure?

The FCA’s final rules require firms distributing IBIPs, to provide adequate reports on the services provided to and transactions undertaken on behalf of the customer. This includes products in force before the rules came into effect. The changes to the rules were implemented on 1 October 2018, so all in-scope customers should receive the first set of information about costs and charges by 1 October 2019.

The disclosure requirements under IDD may be found in COBS 16A.4.2A, summarised below:

• Reports on the service only applies when providing ongoing services (insurance distribution activities) after the conclusion of a contract.
  
  
• Reports must be provided at least annually.
  
  
• Client reporting requirements apply to IBIPS only, including those already in force.
  
  
• Disclosure must include a fair and balance view of the services provided and transactions undertaken during the reporting period, including where relevant total costs and the value of each underlying investment.
  
  
• Existing obligations will continue to apply when considering the information needs of clients and providing them with appropriate information.
  
  
• The periodic disclosure should include the total of costs that have been incurred/charged to the client in the relevant reporting period – i.e. actual costs incurred in the previous year.
  
  
• Reports must be provided in a durable medium – i.e. on paper or something else which enables the recipient to store information addressed personally, in a way which can be accessible for future reference.

How can the requirements for periodic disclosure be met under IDD?

In terms of what costs & charges are to be included in the period disclosure, this is not defined any further than “all costs and related charges”. However, the FCA’s focus appears to be on charges that come directly out of a customer’s pot, rather than the investment and ancillary service charges which fall within the scope of MiFID II. So this would include only costs & charges for the product/fund and distribution.  

We believe that our Annual Benefit Statement (ABS) provides the most effective opportunity to meet the requirement to provide ongoing product/fund costs & charge disclosure.

The ABS also, where relevant, includes the ongoing adviser charges taken through the product. Please note that any additional costs & charges of distribution, such as advisers’ fees, platform charges etc. paid for outside of the product, won’t be included and you will need to disclose these separately.

If you are recorded on our systems as the ‘live adviser’, a copy of the customer’s ABS will be sent to you, as a matter of course, for most of our products. If you haven’t received a copy, please contact us and we’ll send a duplicate.

When will we be making the changes to Annual Benefit Statements to meet the requirements?

As stated above, we intend to disclose all costs and charges incurred by customers under their IBIP in the customers’ ABS. Where the functionality is not already available, we are planning to do this at the same time as we migrate from multiple legacy platforms to a single platform.    

This means that for later migrations, full functionality to disclose all costs and charges as monetary amounts in annual benefit statements, will not be available until 2022. So we’re introducing an interim solution for a small number of legacy products.

For products open to new business since 2013, we are already fully meeting the disclosure requirements within our annual benefit statements, including the disclosure of fund charges as a monetary figure as expected under FCA’s final guidance (FG16/8).

Where your client has any investments in the Prudential ISA, Link Financial Investments Limited will provide them with a costs & charges disclosure document each year. The reporting period will follow the calendar year. Your client can expect to receive this information at the end of the first quarter of the following year.