What must clients be told about financial instruments and about costs and charges?

Firms give clients a general explanation of what financial instruments are and what risks they carry, adapted to whether the client is retail, professional or an eligible counterparty. It covers the type of instrument, how it works and behaves in different market conditions, both positive and negative, and its risks, in enough detail that the client can decide on an informed basis.

The risk description covers, where relevant, how leverage works and what it does, the possibility of losing everything invested, including through the issuer's insolvency or a bail-in; volatility and any limits on the market; obstacles to selling, how to exit and how long it may take to recover initial costs; financial commitments and contingent liabilities; and margin requirements. For a retail client, where a prospectus has been published for a current public offer, the firm says where it is available.

For an instrument made up of two or more instruments or services, the firm describes its legal nature, its components and how their interaction affects the risks. For a guaranteed or capital-protected instrument, it explains the scope and nature of the guarantee, and where a third party provides it, describes both the guarantor and the guarantee in enough detail for the client to assess it fairly.

Firms disclose all costs and charges of the investment or ancillary service and of the financial instruments, including payments to third parties; any third-party payments the firm itself receives in connection with the service are itemised separately. The costs are aggregated so the client understands the overall cost and its cumulative effect on return, and the total is shown in money terms and as a percentage; an itemised breakdown is available on request. Costs in a foreign currency are shown with the currency, conversion rates and costs.

Before the service, firms use costs actually incurred as a proxy for expected costs, or reasonable estimates. After the service, firms that recommended or marketed the instrument, or provided the client with a key information document, and that were in a continuing relationship with that client during the year, send annual information on all costs incurred, on a personalised basis. Both before and after, the firm shows the cumulative effect that costs have on the return, including any anticipated spikes or fluctuations. Since 28 February 2022, where the purchase is agreed by distance communication that prevents the cost information being given in advance, the firm may provide it without undue delay after the transaction, provided the client agreed to receive it then and was offered the option of delaying the transaction until it arrives; the firm must also offer the client the cost information by telephone before the transaction.

The exam material describes the original rule in short form: firms could agree with professional clients and eligible counterparties a limited application of the detailed cost requirements unless derivatives were involved. In the Delegated Regulation the limitation was never allowed for professional clients receiving investment advice or portfolio management, or where the instruments embed a derivative; for eligible counterparties it was barred only where the instruments embed a derivative that the counterparty intends to offer to its own clients.

Since 28 February 2022, under the MiFID II quick fix transposed in Cyprus by Law 9(I)/2022, the cost and charges requirements do not apply to services for professional clients at all, except investment advice and portfolio management, where they apply in full. Eligible counterparties are exempt. Retail clients keep the full regime.