UK Proposals to Ease Unbundling of Research and Best Execution Rules

The U.K. Financial Conduct Authority has launched a consultation on certain proposed changes to the U.K. rules on the unbundling of research and best execution reporting, which are part of the Markets in Financial Instruments Directive (as inherited from the EU). The consultation closes on June 23, 2021, and the FCA is expected to publish its response and final rules in the second half of this year. The proposals are set out in brief below. Some of these are in the same areas covered by the EU MiFID II Quick Fix Regulation, but the FCA is not copying those rules, and it goes further in most areas.

The unbundling research rules

The FCA is proposing to introduce the following exemptions to the unbundling research rules:

• Research on SME issuers: research on firms below the market capitalization of £200 m, provided that the research is provided on a rebundled basis or for free, would become an acceptable minor non-monetary benefit and therefore would not be an inducement. The EU level in the MiFID II Quick Fix Regulation is EUR1 bn. The EU rules also require the firm to inform its clients about the joint payments for research and execution services, and the firm must have entered into an agreement with the research provider identifying the part of the combined charges or joint payments for research and execution services that is attributable to research.
• FICC-related research: third party research that is received by a firm providing investment services or ancillary services to clients, where it is received in connection with an investment strategy primarily relating to FICC instruments. FICC research would be allowed to be rebundled.
• Independent research: where the independent research provider is not engaged in execution services and is not part of a financial services group that includes an investment firm that offers execution or brokerage services, the research would be included in the list of minor non-monetary benefits and would therefore not be an inducement.

Best execution reporting

The FCA is proposing to remove the following best execution reporting obligations:

• The obligation on execution venues to publish a report on a variety of execution quality metrics to enable market participants to compare execution quality at different venues; and
• The obligation on investment firms who execute orders to produce an annual report setting out the top five venues used for executing client orders and a summary of the execution outcomes achieved. The EU MiFID II Quick Fix Regulation provides only a temporary suspension from the obligation of trading venues and systematic internalisers to provide quarterly best execution reports.

HM Treasury is expected to consult on other areas that require changes to legislation covered by the EU Quick Fix Regulation, which could include exemptions from product governance rules and simplification of the position limits regime.

View the FCA's consultation paper (CP21/9).

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