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Has your broker disobeyed your instruction because you didn’t read the KID?

englishaccountant
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Has your broker disobeyed your instruction because you didn’t read the KID?

#120176

Postby englishaccountant » February 24th, 2018, 6:57 pm

On 17Feb2018, I instructed my broker to change my regular investment instruction.

The regular instruction is to a UK broker for a number of share purchases to be held in a UK ISA. The purchases comprise closed-end investment trusts and one EFT.

My broker told me my new investments were PRIIPS and so therefore I had to read a Key Information Document (KID), could I confirm that I had done so.

I was - and still am not - aware any of legal obligation on me to read KID, so I confirmed that I had not read any KIDs and intended not to do so.

The broker rejected my instruction.

I have been challenging my broker to cite the precise regulation that obliges me - a UK retail investor - to read a KID. So far, the broker hasn’t cited the precise regulation, so it looks like this will become a formal complaint to expose the truth and strip hubris right back to the literal legal requirements.

Meanwhile, partly out of academic curiosity - but partly also to shut the broker up, I regret to admit - I read the KIDs.

O.M.G.

I quickly discovered that the KID is a beast of MIFID, which is in turn a beast of the European Securities & Market Authority.

When I screen for investment trusts, as a minimum, I tend to read their current annual reports, review short-, medium- and long-term price movements, and compare its overall investment strategy for compatibility with my own appetite for risk and capacity for loss over a minimum window of 5 years. There’s no limit to the questions I can ask; there is a limit to the answers I can fetch; the best I can do is limit the range of likely risks and minimise the scope of any assumptions I need to use to cover gaps in knowledge. That said, one assumption I always end up making is the directors’ compliance with Companies Acts 1985 and 2006.

By contrast, I found the KIDs to be both pointless and misleading. They listed tautologies, vacuities, contingencies without reference to actual probability and baseless quantitative speculation. Boilerplate statements of the type "this might happen, that might happen" is lazy scaremongering worthy of Project Fear. None of the KIDs enumerated the risks they pretend to highlight, e.g. "the Fund may borrow to purchase assets for the Fund" or "The Manager may use derivatives...": without numbers, how can these statements possibly pass the "so what?" test? This sort of idiocy is akin to a packet of peanuts carrying the words, "Allergy warning: may contain nuts."

Most odious of all in the KIDs are the "performance scenarios", which appear to be calculations based on past performance, effectively contradicting over 20 (30?) years of advice from past regulators that "past performance is no guide to future performance."

In one case, the performance scenario forecasts losses in all scenarios, except for the “favourable” scenario. This did not stack up with the price history. Whether overly pessimistic or overly optimistic, the scenarios’ numbers appeared calculated out of thin air, presented without external comparable and, apparently, us ignorant plebs of retail investors are supposed to understand these pyschobabble numbers natively.

In this respect, one journalist has described KIDs as a "triumph of pseudoscience over common sense."

Yet, all of the companies within the instruction to my broker had demonstrably complied with ESMA’s requirements.

Accordingly, contrary to ESMA’s stated intentions, ESMA's requirements return KIDs that are fundamentally misleading by design. I cannot see how KIDs could be useful to any investor, retail or otherwise.

Therefore, I consider KIDs to be officially-sanctioned fake news, ie. fatuous conjecture buried in a sea of irrelevant and contextless truths and half-truths.

It seems that the companies are as much victims of ESMA’s “sledgehammer-to-miss-a-nut” style of pseudoscientific stupidity as are retail investors. Worse, this means that brokers and other intermediaries are in an absolute no-win situation, irrespective of how their national regulator negates the excesses of ESMA’s pseudoscientific stupidity.

In my case, my broker rejected my instruction because I had not read the officially-sanctioned fake news. Apparently, I was insufficiently misadvised prior to purchase. This cuts right into the client-broker relationship in a fundamentally damaging way that severely erodes the trust a client can afford to have in their own broker. Is this the evil nanny state nannying, or it ESMA simply playing its role in the endless feudal game of moving retail suckers into a place where they can be fleeced without limitation, with the blessing of the state?

For all the value that KID could have contained, to me, the KID is no better a guide to the investment decision than to have read this morning’s horoscope for the company’s investment managers.

Questions for this thread:
  • Whereabouts in either EU law/regulation or UK law/regulation is the obligation on retail investors to read a KID prior to investment?
  • Does your broker insist that you have read a KID prior to investment?
  • How do you propose to use a KID, if at all?
  • If you have complained to your broker, what was your broker’s response?

(Sorry - links to evidence were blocked, so I cannot refer you to the underlying evidence of regulation)

GeoffF100
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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120184

Postby GeoffF100 » February 24th, 2018, 7:28 pm

Here is the Wikipedia entry:

https://en.wikipedia.org/wiki/Markets_i ... ctive_2004

"Client order handling
MiFID has requirements relating to the information that needs to be captured when accepting client orders, ensuring that a firm is acting in a client's best interests and as to how orders from different clients may be aggregated."

It is usual for online brokers to have a box for you to tick to say that you have read the KIID. You do not have to read the KIID, but you do have to tick the box in order to trade.

Of course the KIID is nonsense. The rules were produced in consultation with the financial services industry, and had to be agreed by all the member states.

I do read the KIID. KIIDs occasionally contain some useful information, and are good for a laugh. There is no alternative for the private investor but to educate himself, and seek out reliable and unbiased information, but that is not what the financial services industry wants.

BobGe
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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120445

Postby BobGe » February 26th, 2018, 3:31 am

englishaccountant wrote:Most odious of all in the KIDs are the "performance scenarios"... In one case, the performance scenario forecasts losses in all scenarios, except for the “favourable” scenario.

Worse still: There are many cases where KIDs are recently / currently indicating estimates of significant term gains in 'Favourable', 'Moderate' and 'Unfavourable' scenarios, with only a 'Stressed' scenario showing any losses.

What could possibly go wrong?

TedSwippet
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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120463

Postby TedSwippet » February 26th, 2018, 8:50 am

englishaccountant wrote:I was - and still am not - aware any of legal obligation on me to read KID, so I confirmed that I had not read any KIDs and intended not to do so. ... The broker rejected my instruction.

Why did you just not do what everyone else does in these circumstances and just say that you had read them even if not? When you travel, do you refuse to confirm that there are no explosives in your hand luggage?

Yes, this whole PRIIPS regulation edifice is indeed ridiculous, time consuming, obstructive, and ultimately probably entirely pointless, but both parties, broker and consumer, have to pay lip service to it. Your broker did not disobey your instructions because you didn't read the KID. They could not follow them because you deliberately gave the obvious wrong answer to a simple question. And that is your fault, not theirs.

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120483

Postby Alaric » February 26th, 2018, 10:37 am

BobGe wrote:What could possibly go wrong?


The risk assessment to my mind totally misses the point. It seems based only on price fluctuations and not on the relative likelihood of an asset catastrophe. From that viewpoint a specialist IT is riskier than a mainstream benchmark or index tracker.

Without knowing where they got the assumptions from, the various scenarios lack value and indeed show even supposedly poor performance as attractive.

On investment products like ITs, showing future values isn't really necessary, since if you really want to know how much £ 10,000 accumulates to at 5% over 5 years, your calculator can tell you. Quoting future values is a hangover from the life assurance industry where products were full of complex charges and rebates and you needed the future values and reduction in yield to make any sense of them.

It would be nice to blame the EU and expect to abolish these requirements when (or if) we leave. The hand of the FCA does seem to be all over this stuff. I don't know if it will ever happen, but it would be nice to see a Select Committee give the authors of this regulatory nonsense a good public grilling.

There's an irony on the American and other international markets that they haven't had the courage to ban or attempt to ban individual purchases of shares. The less risky approach of buying a package of such shares also on the American market is banned unless the US provider is prepared to supply EU regulatory material.

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120503

Postby flyer61 » February 26th, 2018, 11:28 am

englishaccountant welcome to the Lemon Fool and thanks for a very informative post.

I hope you will contribute further and share your portfolio and investment ideas.

Flyer61

Howard
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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120539

Postby Howard » February 26th, 2018, 1:23 pm

Having read the posts above I was interested in the broker's reaction when I phoned to make an initial investment in Foreign and Colonial IT (FRCL) today.

I asked him if there was a MIFID issue and he said "Yes, you have to confirm you have read the KID". I said "Yes" I've looked at it online. This was accepted and the trade went through.

So isn't this similar to having to update Ipad software and being asked if I agree to 30+ pages of Terms and Conditions from Apple? A feature of modern life?

regards

Howard

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120540

Postby GoSeigen » February 26th, 2018, 1:24 pm

TedSwippet wrote:
englishaccountant wrote:I was - and still am not - aware any of legal obligation on me to read KID, so I confirmed that I had not read any KIDs and intended not to do so. ... The broker rejected my instruction.

Why did you just not do what everyone else does in these circumstances and just say that you had read them even if not? When you travel, do you refuse to confirm that there are no explosives in your hand luggage?

Yes, this whole PRIIPS regulation edifice is indeed ridiculous, time consuming, obstructive, and ultimately probably entirely pointless, but both parties, broker and consumer, have to pay lip service to it. Your broker did not disobey your instructions because you didn't read the KID. They could not follow them because you deliberately gave the obvious wrong answer to a simple question. And that is your fault, not theirs.



I hope the above was intended to be tongue in cheek and ironic. It lacks the usual smileys...


My broker has an idiotic question every time I log on as third party on a family member's account -- I am asked who makes the trading decisions for the account: me or the account holder. It's dumb on a number of levels, but to mention a few:

-the account holder has authorised me to act on their behalf as agent so is there really a distinction?
-the question is asked in the above vague form, so does it refer to trades made in a particular login, or to the general trading strategy, or to the majority of the trades, or regarding execution of an agreed trade at one price as opposed to some other price?
-It is stated to be a requirement of the regulator to ask this question, yet no other broker feels the need to do so.
-etc


GS

taken2often
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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120586

Postby taken2often » February 26th, 2018, 5:12 pm

This KID rule has cut me off from the US and any other Global Funds. It would be illegal for US Funds to produce this document as it has false claims.
I have been buying some UK IT funds and H-L did not ask if I had read the KID. My understanding is that it must just exist.
This has created a EU Monopoly. Once this has been fully appreciated it may be modified. Usually there would be a disclaimer on the purchase stating do you realise that there is no KID for this product. Then we Grown-Ups could make a decision.

Bob

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120592

Postby Alaric » February 26th, 2018, 5:34 pm

taken2often wrote:This KID rule has cut me off from the US and any other Global Funds.


There is a "get out of jail" where you certify yourself as a high net worth or experienced investor or both. The mass market online Brokers, perhaps understandably, are reluctant to risk conflicts with regulators or having to ask even more intrusive questions to support this.

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120783

Postby strophe » February 27th, 2018, 2:47 pm

Alaric wrote:There is a "get out of jail" where you certify yourself as a high net worth or experienced investor or both.


I believe this also entails giving up your statutory rights to FSCS compensation if the broker goes bust in future. (Although this only covers the first £50k of investments in any case.)

This ridiculous piece of bureaucracy is being called the "worst piece of financial regulation ever in Europe".
http://citywire.co.uk/wealth-manager/news/regulation-heavyweight-tells-fca-heads-should-roll-over-priips/a1086849

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120791

Postby BobbyD » February 27th, 2018, 3:05 pm

strophe wrote:I believe this also entails giving up your statutory rights to FSCS compensation if the broker goes bust in future. (Although this only covers the first £50k of investments in any case.)


Any source for this? High net worth investor is only £250k.

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120819

Postby strophe » February 27th, 2018, 4:34 pm

BobbyD wrote:
strophe wrote:I believe this also entails giving up your statutory rights to FSCS compensation if the broker goes bust in future. (Although this only covers the first £50k of investments in any case.)


Any source for this? High net worth investor is only £250k.


I think I may have got this wrong (which would be a relief!)

I was thinking of a sentence in the iDealing T&C which states
Professional clients are not eligible complainants with respect to the Financial Ombudsman Services (“FOS”)
https://www.idealing.com/pdf/en/professional_client_request.pdf

But of course the FOS is not the same as the FSCS. So this doesn't actually imply anything about investor compensation.

Sorry about the confusion.

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120829

Postby strophe » February 27th, 2018, 5:06 pm

Here's the previous discussion on this topic, for anyone who missed it.
https://www.lemonfool.co.uk/viewtopic.php?f=55&p=106016

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#120861

Postby BobbyD » February 27th, 2018, 6:31 pm

strophe wrote:
BobbyD wrote:
strophe wrote:I believe this also entails giving up your statutory rights to FSCS compensation if the broker goes bust in future. (Although this only covers the first £50k of investments in any case.)


Any source for this? High net worth investor is only £250k.


I think I may have got this wrong (which would be a relief!)

I was thinking of a sentence in the iDealing T&C which states
Professional clients are not eligible complainants with respect to the Financial Ombudsman Services (“FOS”)
https://www.idealing.com/pdf/en/professional_client_request.pdf

But of course the FOS is not the same as the FSCS. So this doesn't actually imply anything about investor compensation.

Sorry about the confusion.


Phew! Thanks for the correction.

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Re: Has your broker disobeyed your instruction because you didn’t read the KID?

#130602

Postby GeoffF100 » April 7th, 2018, 6:38 pm

Here is a relevant comment on Monevator:

http://monevator.com/the-slow-and-stead ... ent-885854

The KIID requires a projection of future performance, but the US regulator does not allow that.


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