UK Conduct Authority Publishes Review Findings for EU Research Unbundling Rules
09/19/2019The U.K. Financial Conduct Authority has published the outcome of its review of the research unbundling reforms implemented in the EU by the revised Markets in Financial Instruments Directive. MiFID II has applied across the EU since January 3, 2018. MiFID II restricts the payment or receipt of all fees, commission and non-monetary benefits ("inducements") unless these enhance the quality of service provided to a client, and do not impair an EU investment firm's duty to act in the best interests of its client. Any inducement that is a minor, non-monetary benefit is exempt from the limitation. Research provided by any third party (regardless of location) to an EU investment firm providing investment services or ancillary services will be regarded as an "inducement" and subject to the inducement prohibition, unless the research is received in return for either direct payment by the investment firm out of its own resources or payment from a separate research payment account (RPA). "Soft dollar" commissions are not allowed, unless these are done through an RPA. The rules have impacted buy-side and sell-side firms in the EU, as well as their non-EU counterparts.
The FCA's review found changes in the asset management and research market since firms implemented the rules. In particular, the FCA discovered that:
- the rules have improved accountability and transparency of research and execution costs for investors;
- buy-side firms are able to obtain the research that they need;
- research valuation models have varying levels of sophistication, particularly in evaluating the quality of research. The FCA expects firms to enhance their models to ensure that they act in the best interests of their clients;
- research pricing levels are different across the market and the FCA intends to monitor this for any competition issues; and
- some firms were unsure how the rules applied in certain situations, such as attending trade association events, marketing research services or making contributions to consensus forecasts.
The FCA has provided some guidance in its detailed summary of the findings from the review, including:
- brokers contributing to consensus forecasts will fall outside of the inducements rule. However, if an asset manager wanted to talk to a contributing broker's analyst, then the inducement rules are likely to apply;
- on the classification of benefits as non-monetary benefits, the FCA's view is that reasonable marketing materials or attending ad hoc meetings where research products are promoted, and the reasonable serving and accepting of refreshments at such events, would not fall within the inducements rules;
- attending trade association events is generally outside of the inducements rules on the basis that a firm's attendance, due to the nature of the events, is unlikely to be in connection with its services to a specific client;
- the FCA expects firms delegating portfolio management services to ensure client protection under the delegation arrangements, in compliance with MiFID II;
- a firm is not in breach of the rules if it does not share research with other group entities, provided that this practice does not influence a firm's order routing or ability to act in its clients' best interests; and
- lengthening the three-month trial period to six months would likely result in the benefit not being classed as minor.
The FCA acknowledges that firms' research arrangements are continuing to develop and therefore it intends to undertake further work in 12 to 24 months.
View the FCA's review outcome page.
You may like to read our client notes covering this important topic, available here.
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