The following summary of the research rules contained in the latest MiFID II draft is provided by Nicholas Dray, Manager of Independent Research & Commission Management at Marex Spectron, a London-based broker which introduces independent research to asset managers. ResearchWatch subscribers can view the latest draft rules at http://www.integrity-research.com/analysis-of-mifid-ii-final-research-payment-rules/.
In Marex Spectron’s most recent update, we focused on the likely delay by regulators of the implementation of MiFID II to January 2018. While the delay has not yet been formally announced, as reported in the FT on 16 December Steven Maijoor, the chairman of ESMA, has called for a new implementation schedule, noting the logistical challenges presented with the existing timetable. While the delay has not been announced, there appears to be widespread acceptance amongst the industry that this is a fait accompli.
Following the leaking of various documents, we understand that new delegated acts relating to investment research will contain the following:
Research is not an inducement if it is received in return for:
- Direct payments by the investment manager out of its own resources (which can then be reflected in an increase in management fees)
- Payments from a separate research payment account (RPA) controlled by the investment firm (with the following conditions):
- RPAs shall only be funded by a specific charge to the client and can:
- Only be based on a research budget set by the investment manager for the purpose of establishing the need for 3rd party research
- Not be linked to the volume and/or value of transactions executed
- Where a client research charge is not collected separately but alongside a transaction commission, it has to indicate a separately identifiable research charge
- The total amount of research charges received in the RPA may not exceed the research budget
- Firms must agree with clients the budgeted research charge and the frequency with which the charge will be deducted from the client over the year. Changes must be communicated. If there is a surplus, the firm should have a process to rebate the funds to the client (or offset against the following period’s charge)
- Investment firms must set and regularly assess a research budget, based on a reasonable assessment of the need for 3rd party research with audit trails of payments and reference to determinations of quality of research
- Investment firms are responsible for operating the RPA but may delegate the administration to a 3rd party ‘provided that the arrangement facilitates the purchase of 3rd party research and payments to research providers in the name of the investment firm without any undue delay in accordance with the investment firm’s decision’
- Investment firms shall regularly assess the quality of the research based on its ability to contribute to better investment decisions by way of a written policy and communicate this with clients
- An investment firm providing execution services shall identify separate charges for these services that only reflect the cost of executing the transaction. The provision of each other benefit or service shall be subject to a separately identifiable charge
It would seem that the RPA model will be the adopted means of research procurement under the new regulations – we have believed this to be the most likely scenario for some time. With this vehicle comes a significant obligation on investment managers to set budgets, as well as draw up and implement policies which set out a firm’s processes around research procurement, consumption, and quality assessment criteria. Additionally, all of these policies will need to be communicated to their clients. It appears to be a heavy administrative burden.
Many industry participants would be particularly interested to see what becomes of the existing CSA model under the new framework.
The document does not refer to CSAs specifically, but it does set out conditions in which a single payment could be made to an execution broker, “Every operational arrangement for the collection of a client research charge, where it is not collected separately but alongside a transaction commission, has to indicate a separately identifiable research charge…” This appears to be the clause which allows for the continuation of the existing model to some degree, but modification will be necessary.
We must stress that this is, in fact, a leaked draft and not the final delegated acts. There is still the very real possibility of revision prior to publication. Additionally, the – crucial – interpretation of the text by the FCA, may lead to a different outcome again. We watch this space with interest.