PDF V878A MiFID II - Costs and Charges QA-Oct 2017 External

Costs and charges Q&A for EU regulation on MiFID II and Packaged Retail and Insurance-based Investment Products (PRIIPs)

1. What are the changes to Costs and Charges disclosure for Investment Funds? There are three regulatory changes coming into force in 2018 which require similar information regarding costs and charges for investment funds to be disclosed. These are set out below.

MiFID II comes into force in January 2018. It requires new disclosures for both presale and post sales costs and charges information to be given to investors in Vanguard Funds by their Advisers or other Distributors. Vanguard will provide information to Advisers and Distributors to enable them to do this.

PRIIPS also comes into force in January 2018. Initially it will only impact Insurance and other non UCITS investments products. This means that these regulations do not directly affect Vanguard but insurance and other firms who use Vanguard funds within their products will require information from Vanguard to enable them to meet the PRIIPs regulations.

There are also new requirements for Trustees of workplace pensions who need to ensure they are getting value for money. Trustees will require additional costs disclosures to be able to meet their obligations.

2. What information will be disclosed? MiFID II requires Distributors to provide costs and charges information to investors both presale (ex-ante) and post-sale (ex-post). Distributors will need to add fund costs with any Distribution and Service costs to present a single aggregated figure to end investors which is called `Total Cost of Investing'. This will include the components set out below.

? One-off charges: All costs and charges paid to fund providers at the beginning or at the end of the investment in the fund. This includes front-loaded management fee, structuring fee and distribution fee. Vanguard does not currently have any one-off costs.

? Ongoing charges: All ongoing costs and charges related to the management of the fund that are deducted from the value of the fund. This includes management fees, service costs, securities lending costs and taxes, custody, etc.

? Transaction costs: All costs and charges incurred as a result of the acquisition and disposal of underlying investments within the fund. This includes broker commissions, entry and exit charges, spreads, stamp duty, transactions tax, and foreign exchange costs.

? Incidental costs: Performance fees and anything similar.

The PRIIPS regulations require similar information but the Insurance Company will need to present these to the investor as a series of `headline' figures, some of which are aggregates of underlying charges, and then as a single total figure for the retail investor.

3. What is different to today? Much of the information to be disclosed is already disclosed today. However there are two main differences: ? The underlying costs of the investment trading within the funds will need to be disclosed. These costs include both the explicit costs (brokerage, tax etc.) and the implicit costs (essentially any loss caused by price movements that may occur while the trade is being executed).

? In addition, any other costs paid by the funds which are not included in the current Ongoing Charges Figure `OCF' need to be captured and disclosed. For Vanguard funds these are the costs associated with securities lending, such as agents fees and taxes, or overdraft charges on bank accounts used in the operation of the funds.

? In addition to presale disclosures Distributors will now need to provide investors with an annual statement showing what they have paid in GBP or Euros, over the preceding year.

4. How are Implicit Transaction Costs calculated? Implicit transaction costs relate to the costs that arise during the time a trade is executed. Different calculation methodologies can be used depending on the age of a fund and the availability of underlying information. Firms are likely to use different methodologies and we can expect some confusion until things settle down.

If a fund has been operating for less than three years the implicit transaction costs can be calculated using an estimate based on an underlying index or indices. (This is called the New PRIIPs Methodology).

For funds with three or more year's history the implicit transaction costs can be calculated based on the difference between the price at the time the instruction was sent and the price actually paid and. If the prices at time the instruction was sent is not available, firms may use that day's opening prices or the previous day's closing price. The result is that what is reported as `costs' is essentially the impact of price movements which can be large and may lead to odd looking results (This is called the Full PRIIPs Methodology).

We should explain that the above are methodologies prescribed under PRIIPs. MiFID II provides no descriptive methodology for transaction costs but indicates that the PRIIPs methodologies can be used. Vanguard is therefore initially basing the transaction costs calculations on the New PRIIPs Methodology.

We believe that over the medium term most Firms will use the Full PRIIPs Methodology and Vanguard is actively looking at this methodology but is yet to commit to producing transaction cost calculations using this before the PRIIPs regulations apply to UCITS in 2020.

5. Will direct investors in Vanguard's UCITS Funds receive costs and charges information? Under MiFID II it is the Distributor of a fund who has the requirement to present the costs and charges information to investors. Most investors buy Vanguard funds via a Platform or some other Distributor and so will receive this disclosure, our Personal Investing service is also a Distributor. However, investors who have not bought our

funds through a Distributor are not directly in scope. To treat all investors fairly, we are making information available on the Vanguard website to provide all investors with fund level costs and charges information.

6. Can Vanguard provide transaction cost information for a pension scheme? Vanguard will be able to provide transaction costs based on the costs calculated for MiFID II and PRIIPs clients. We expect this to be available in early 2018.

7. Is there any connection between MiFID II and Vanguard implementing swing pricing? No. The decision to move to swing pricing was independent of MiFID II but the decision to complete this change before January 2018 was relevant. We've taken the opportunity to avoid duplicate work and simplify our cost and charges before MiFID II takes effect.

8. How will costs and charges information be made available to clients or distributors who require it? Vanguard will use the standard templates have been developed by the European Funds Industry. Data will be provided to Distributors using the European MiFID Template (EMT) and to PRIIPS clients using the European PRIIPS Template (EPT). As these are standard industry templates we will not offer bespoke versions on a client by client basis. The templates will be disseminated to the usual data vendors, posted on our website and be available on request.

We will also provide a summary of fund costs and charges information on our website in a pdf format for anyone to use if they wish.

9. When, and how often will the underlying data be sent out to Clients and Distributors? We will have the necessary information available in early December 2017 so that Insurance Companies and Distributors can consume it. We expect that the templates will be produced on a quarterly basis thereafter.

For more information in relation to the above Q&A please send an email to mifid_ii@vanguard.co.uk

General Important Information

This document is directed at professional investors only as defined under the MiFID Directive. Not for Public Distribution. The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority. ? 2018 Vanguard Asset Management, Limited. All rights reserved.

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VAM ? 311476 Nov 2017

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