MiFID II Will Not Ban Research Commissions

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According to an article the Financial Times, European legislators have decided not to ban the use of client commissions for the payment of research, as proposed by UK regulators.  During a presentation at a Financial Times event in London, a member of the European parliament said that the priority for European regulation should be commission disclosure not a ban on research commissions.

Kay Swinburne, the Member of the European Parliament (MEP) representing Wales, participates in the Committee on Economic and Monetary Affairs, which is involved in new financial regulation under MiFID II.

The FT quoted her as saying that a ban on paying for research through client commissions was off the table:  “The banning of dealing commissions was discussed in meetings and there was a clear decision taken to not ban the use of commissions,” adding “MEPs have subsequently made it very clear to ESMA [the European Securities and Market Authority] that disclosure of the use of commissions is sufficient and banning of commissions should be off the table.”

It is telling that a MEP representing the UK is opposed to regulation proposed by the UK Financial Conduct Authority (FCA).  Ms. Swinburne is Conservative co-ordinator for Economic and Monetary Affairs, having been elected to the European parliament after a career in investment banking.

Frustrated by its perception of a lack of industry progress on commission transparency, the FCA proposed a ban on research commissions in July, igniting a firestorm of opposition.  The FCA had hoped that the ban would be incorporated in pending European regulation under MiFID II.  However, its stance mobilized protests from a wide variety of industry participants, including asset managers, investment banks and independent research providers and their respective trade associations.

An influential advisory group to European securities regulators attacked the proposal and senior French regulators went public with their opposition to a ban.

Even though MiFID II regulation will now likely not ban payment for research with client commissions, there is nothing to prevent the FCA from taking a stricter stance.  As Ms. Swinburne noted, “The FCA, however, has the flexibility to go further under investor protection if they choose to do so, and we need to make sure they do not deviate too far away from the ESMA rules.”   She argued that separating costs could hurt the research market and efforts to bring companies to the market, concerns similar to those voiced by French regulators.

However, the FCA does not need to implement new regulation to shake up the industry.  The new guidelines it implemented in June are doing that already, as we have noted.  The new regulation banned the payment for corporate access with client commissions, required more rigorous valuation of bundled research, and prohibits payment for research which is not utilized.

As we predicted two months ago, MiFID II will not ban research commissions.  However, that does not mean the industry does not face significant reform.  European regulators seem disposed to use MiFID II to prod the industry for more commission transparency.  CSAs are well positioned to benefit.

We also suspect that European regulators will go even further toward replicating the current FCA rules, whether or not explicit language is incorporated in the MiFID II rules.  European regulators may not have the FCA’s detailed understanding of research commissions, but they can grasp the concept that research payments should not increase just because trading volumes increase.  It is even possible that the SEC might make a token effort in the interest of regulatory harmony.

While the industry might breathe a sigh of relief at averting a ban on research commissions, the prospect of broad regulatory acceptance of the new FCA regime will be more than sufficient to ensure major changes in the research landscape.

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