We help you future proof your system:
1. MiFID II
The Markets in Financial Instruments Directive (MiFID II) aims to make financial markets more efficient, resilient and transparent. Central to this is the strengthening of investor protection. This includes creating more transparency around third-party inducements received by investment advisors by requiring them to disclose these to their end-customer.
MiFID II: implications for financial institutions
1. Different treatment of independent and fee-based advice
The current draft directive regulates the acceptability of third party payments. Independent financial advisors are no longer allowed to receive third party inducements and must shift to a fee-based advisory model. In parallel dependent and commission-based advisory/sales models continue to exist. The (partial) abolition of trailer fees means that many investment companies have to rethink, or at any rate, adapt their fee models
2. Cost transparency and reporting at customer level
MiFID II requires investment firms to provide an exact breakdown of the cost of services rendered to their customers
Many firms do not have a process in place that enables them to track and report exact costs at a customer level.
Let us provide you with a centralised system to handle all your service fees.
calculo masters all fee structures related to independent and fee-based advisory. It enables you to manage and process all service fees through a single system. As calculo is based on a flexible, rules-based framework, the relevant department can react to regulatory changes immediately and adjust the software with little effort.
Through flexible interfaces, calculo integrates seamlessly with existing systems and allows modular expansion.
2. UCITS V
A new element of the UCITS V regulation is a general ban on outsourcing by custodian banks, with the exception of a defined catalogue of activities.
UCITS V: Implications for custodian services
Fund monitoring can no longer be outsourced. It has to be performed by the custodians themselves. Depending on the translation of the directive into national law, already the use of a management company provided system may be interpreted as outsourcing. Subsequently, affected custodians must monitor fees on their own systems.
To establish an in-house fund monitoring system.
calculo replicates the fee models of all management companies. The data is stored separately through a technical solution. This makes it possible to monitor all funds’ fees centrally, through a single platform.
3. BaFin sample cost clause (Musterkostenklausel)
The German Federal Financial Supervisory Authority (BaFin) has restricted performance-based remuneration.
Implications for management companies
Predefined calculation parameters
When calculating performance-based fees, parameters such as the accounting period and the carrying forward of losses are prescribed.
Some of BaFin’s guidelines are not formulated clearly
Management companies have to invest a lot of effort into interpreting the sample cost clause, in order to be able to implement it.
Depending on the starting position, significant changes may be required.
In close cooperation with customers, Sowatec has developed an interpretation of the sample costs clause, in relation to performance-based fees. The result is a tried and tested standard model. Customers can use this model as a reference. This reduces costs and saves time.
4. ESMA: European Guidelines for Performance Fees
The European Securities and Markets Authority (ESMA) published its final performance fees guidelines for UCITS (Undertaking Collective Investment in Transferable Securities) and certain types of AIFs (Alterntive Investment Funds). This is a key step to ensure a supervisory convergence and provides standardization in determining the performance fees structures and mechanisms within the EU.
Summary of the Guidelines
1. The crystallization frequency (point of time when the fund manager updates the high-water mark and the incentive fee is paid) should not be more than once a year.
2. Funds using a performance fee model based on a benchmark index should recover any underperformance compared to the benchmark, during a reference period of at least five years or the whole life of the fund, before any performance fee becomes payable.
3. Performance fees for funds using a high water-mark model should only be payable where the new high watermark exceeds the previous one, during a reference period of at least five years or the whole life of the fund.
4. Funds allowing performance fee payment in times of negative performance should include a prominent warning to this effect in the KIID (Key-Investor-Information-Document).
5. The performance fee model and the computation methodology should be explained in legal documents (specially in prospectus) as well as in marketing materials.
Find here the detailled summary of the guidelines.
Get here to the website of ESMA.
Management companies have to invest a substantial effort in interpreting each Performance Fee method applied, in order to check whether each one of them complies with the ESMA guidelines.
Depending on the method implemented, significant changes may be necessary on the fund administration side.
In close collaboration with customers, Sowatec has developed Performance Fee calculation methods that meet ESMA guidelines. Customers can use these models as a reference and profit from Sowatec's expertise, saving time and money.