How to create MiFID II and IDD disclosure documents

To comply with UK regulations, you must provide clients with a comprehensive breakdown of all costs and charges—both for your advice and the underlying financial products—before any business is transacted (ex-ante) and on an annual basis thereafter (ex-post). This document must clearly show the total cost in both pounds and pence and as a percentage, including a "cumulative effect" illustration that demonstrates how these fees reduce the potential growth of their investment over time.

Understanding MiFID II and IDD

While these acronyms sound like heavy jargon, they represent two sets of rules designed to protect consumers. MiFID II (Markets in Financial Instruments Directive) generally covers investment services and products like shares, bonds, and most pensions. The IDD (Insurance Distribution Directive) covers insurance-based investment products. For most financial advisers in the UK, you will need to produce disclosure documents that satisfy both, ensuring your clients are never surprised by a hidden fee.

What Must Be Included in the Disclosure?

Your disclosure documents must be "clear, fair, and not misleading." You cannot simply point to a provider's brochure; you must aggregate all costs into a single, easy-to-read format. The disclosure is split into two main categories:

Category	What to Include
Service Costs	Your initial advice fees, ongoing management fees, and any administration or "platform" fees the client pays to hold the investment.
Product Costs	The fund manager's annual management charge (AMC), transaction costs (the cost of the fund buying/selling assets), and any "incidental" costs like performance fees.

The Cumulative Effect of Costs

One of the most critical requirements is showing the "cumulative effect of costs on return." This means you must show the client how much higher their pot could have been if there were zero charges. Usually, this is presented as a table or a graph showing a hypothetical growth rate (e.g., 5%) versus the actual growth after all your fees are deducted (e.g., 3.2%).

You must show this in two ways:

• Percentage terms: "Total costs represent 1.8% of your investment per year."
• Cash terms: "Total costs will amount to £1,800 over the first year."

Steps to Create Your Documents

1. Gather Data from Providers: You are reliant on fund managers and platforms to provide their cost data. Most UK providers now offer "MiFID II data sheets" or "EMTs" (European MiFID Templates) which list these figures clearly.
2. Design a Template: Create a standard template for your firm. It should have a section for "Adviser Charges" and a section for "Product Charges," followed by a "Total Cost" summary.
3. Standardise Your Assumptions: To show the cumulative effect, you'll need to pick a standard investment term (e.g., 1 year or 5 years) and a standard growth rate (aligned with FCA projection rates) so the math is consistent for every client.
4. Include a "Pounds and Pence" Table: Create a table that breaks down the costs based on the specific amount the client is investing. For example, if they are investing £50,000, show exactly what that looks like in cash.
5. Review for IDD Specifics: If you are recommending an insurance-based product, ensure you also include any commissions or "inducements" received, though most modern UK advice is now fee-based rather than commission-based.

Pro Tip: Many "back-office" software systems for financial advisers have built-in MiFID II calculators. If you use a tool like Intelligent Office, Xplan, or Plannr, check if they can auto-generate these cost disclosure tables based on the products you've selected.

Best Practices

• Don't hide the "Transaction Costs": Even if the fund manager says transaction costs are 0% or "implicit," you must mention them. If they are unknown, you must provide a reasonable estimate.
• Be Timely: The ex-ante (pre-sale) disclosure must be given to the client before they sign any application forms. Failure to do this is a serious compliance breach.
• Keep it Simple: While the data is complex, the presentation should be simple. Use bold headings and avoid long paragraphs of legal text where a simple table will do.