At our recent conference on the European Union's Markets in Financial Instruments Directive, one panel looked at the reams of information with which firms will be forced to burden HNW customers as they struggle to achieve 'best execution' for them.

Tom Burroughes, the editor of our sister-publication WealthBriefing, asked about the obligation of firms to give enormous amounts of information to their clients in a form that is digestible and easy to understand.

He argued: "At a previous panel we did in Geneva, one of the panellists pointed out that clients don't want to be buried in information because it makes them suspicious that you're trying to hide something. If you give people vast amounts of information they think 'is he trying to throw sand into my eyes here? Why can't he just put it in a neat paragraph?' As an editor, I can tell you that it's a great skill to communicate a lot of information in a simple form. It's not easy. People don't want their in-boxes jammed up with data."

Jonathan Wilson, a consultant at Cordium, indicated that although every firm's execution policy was to go into a very detailed internal document containing the full panoply of fund types, investment strategies, types of execution, priorities among execution factors etc., its clients need only receive broad statements and summaries of those things.

Regulators to blame?

Roddy Buchanan, the head of wealth management at WH Ireland, agreed: "It will be acceptable, we believe, to present an execution policy to one's clients that contains less granularity than is the case in terms of one's internal procedures.

"What does worry me – and I don't have an answer to it - is the disclosure requirements which the letter of the regulations can seem to suggest will be necessary when, for instance, one takes an execution factor which one finds not to be working quite as one expected. One changes the relative co-ordinates and there one comes, I suppose, into the whole field of materiality, as to what it is expected by the regulations that one actually has to disclose to the client on an ongoing basis.

"So I think that the conundrum is these things that change where one's fixing things where one's changing execution venues, that they're from the top five that one has to list within one's policy, all the time that one highlights these to clients, then I think there is inevitably a question which comes across clients' minds which is: why are they telling me this? It doesn't really interest me. What is it that they're trying to prove? Or, for that matter, what is it they're trying to hide?

"Now I've always maintained in my career in the wealth sector within teams that I've managed, that it's a very lame excuse to blame the regulator for the changes one is making. In most cases, I think one can quite justifiably explain to clients that the questions one is asking or the information that one is disclosing is in their best interests and is designed to make them either better informed or better protected. But I have to say that in terms of some of the disclosures that we now will be required to make under the new rules, I would begin to question that, because for most clients it will actually go straight over their heads."

Disclosure fatigue – more common than one might think

Colin Berthoud, the co-founder of TIM Group, brought up an example of 'customer information fatigue' from the previous year in relation to the European Union's Market Abuse Regulation: "We were being told to make disclosures to thousands of buy-sides and hundreds of them said 'stop sending me this stuff, can you please divert it to this mailbox over here?' So every disclosure went to that one mailbox which kind of made the brokers happy, it made the buy side happy. No-one was looking at that information so it was a wasted effort and so I think that sometimes this overload of disclosure is a waste of time."

The panel then looked at the problems that firms face in future when they have to look at prices, costs, speed, the likelihood of execution settlements and any other relevant considerations in the light of technical advice issued by the European Securities and Markets Authority.

Roddy Buchanan was the first to tackle this very wide question, reminding the audience that Article 27 of MiFID II sets out the details of each firm's obligation to execute orders on the terms most favourable to the client.

"These factors haven't really changed since MiFID I but what has changed is, if you like, stuck beneath the surface in terms of the regulatory standards requiring firms to provide far greater transparency around each of those factors. I'll come back to that.

"There is also perhaps greater emphasis now being placed upon total consideration whereas price might have been seen as one of the primary considerations in the past.

"The introduction of the term 'fairness' which, in relation to over-the-counter (OTC) products, ESMA has helpfully clarified, could be determined by gathering market data used in the estimation of the pricing of such products and then comparing them with other similar products.

A huge amount of data

"But in terms of the granularity around the various execution factors, as I say, they haven't really changed from MiFID I. In terms of the scrutiny, though, being applied to those factors, this is where the changes really occur. [Look at the] data that needs to be related – it's a huge amount of data. [Then firms have to] assemble that data in a coherent way to be able to assess comparability.

"The added complexion around it is in taking into consideration the factors themselves. One also needs to take into consideration the trading venues and put that all together in the mix. It'll be very interesting when one comes to disclose the quality of one's best execution just to see what variances occur across the industry because rival competitor organisations will all be publishing similar data and they may all manage to achieve the best possible outcome, but we all know a market doesn't work that way.

"So what does it actually mean in practice for various factors of execution? Firstly, the guidance is that rather than just taking into consideration the factors one would be required to document in one's internal procedures, the relative importance one places by each of those factors, having documented it, one will then be expected to follow the procedures that you've actually documented.

"It makes sense but in a sense one is also making a noose to hang oneself on the basis that then one is expected to monitor the effectiveness of the relative importance being placed behind each of those factors and, at the end of the day, get a tick of the box in terms of having achieved the best possible outcomes. So you have to have to have procedures, you've then got to follow them, but there is an absolute determination on the part of the regulator that if any of those factors of relative importance that you've placed upon them is incorrect and it led, possibly, to an outcome that wasn't the most favourable, then one is required to go back to the procedures, change them, re-train the people, re-embed it in one's operational processes such that it then achieves the best possible outcome.

"If that wasn't enough, come the end of the year, then one is expected to publish the results to prove that one has actually achieved best execution. As if that, in a nutshell, wasn't enough, and I absolutely agree this needs to be embedded and owned by the front office rather than by the clients area, but actually when one looks at the factors around best execution [and] the relative importance one places beside them, then just multiply the complexity by the number of different instruments that one is going to be executing transactions in, because the relative importance that you might place against one financial instrument could be substantially different from another and your procedures need to be sufficiently detailed to make that differentiation."

In summing up, Buchanan said that the problems were twofold. The first of them was how best to manage data and make it available. The second was how best to put it all together, make sense of it, document it in sufficient detail and ensure that at the end of the day the firm can prove that it has indeed achieved 'best execution.'

The '50% problem'

Chairman Bruce Weatherill reminded the audience of wealth managers and compliance officers of something that Martin Wheatley (the FCA's previous chief executive) once said: "the problem with the UK is that over 50% of the population doesn't know what 50% means."

He linked this to the 'information overload' problem: "If you've got [that] and then you've got Roddy talking through some quite interesting but very complex things, clients can turn around afterwards and say thank you Roddy, very interesting but I didn't understand it anyway, now you're to blame! That retrospective problem is a real challenge for an organisation isn't it?"

Buchanan agreed: "It is a real challenge. It comes back to our earlier comments and that is this apparent contradiction between the level of detail one is expected to go into – an area which is potentially really quite complex – and yet to present it in a manner to one's underlying clients that is readily understandable. That problem is going to pose a huge challenge to firms as they try to address the new regulations."

Compliance Matters will publish other highlights from the conference – and indeed from this panel – in due course.