Transparency of costs
An investment firm must inform its clients about the total costs of the investment services and the financial instruments. Cost transparency requirements also apply to professional investors and eligible counterparties.
Summary of rules
In short, the rules with regard to transparency of costs are as follows:
1. The investment firm must provide a total overview of all the expected costs to the client before providing any services (this is referred to as ex-ante cost transparency). All costs are defined as: the costs of the services (investment services and ancillary services) and the cost of the financial instrument, for example the transaction costs that a fund incurs when buying and selling securities.
The cost transparency requirements for financial instruments are applicable when an investment firm recommends or sells financial instruments, or has an obligation to provide a PRIIPs KID or UCITS KIID.
2. The investment firm must make use of an illustration to give its client insight into the cumulative effect of the total costs on the return.
3. The investment firm must inform its client about the manner in which the costs are charged.
4. An investment firm that has an ongoing relationship with a client must provide information about the total costs charged to the client (ex-post cost transparency) at least once a year. This information can be included in the regular periodic reports.
Sample case studies and frequently asked questions
Two sample case studies describe how an investment firm can comply with the provisions regarding transparency of costs in various situations and moments in time.
See also several Q&As of ESMA about the transparency of costs and a list of frequently asked questions from the AFM.
AFM investigation into transparency of costs
In 2021 and 2022, the AFM conducted an investigation into compliance with the ex-ante and ex-post cost transparency requirements. This investigation prompted the AFM to draw up additional guidance for investment firms on how to provide ex-ante and ex-post information to investors.