An article in Financial News reports that members of the European Commission rejected an attempt by certain Members of the European Parliament (MEPs) to soften pending regulation which will prohibit asset managers from paying for investment research with client commissions.
In a meeting yesterday between the European Parliament’s Economic and Monetary Affairs Committee and representatives of the European Commission, the EC defended the current language and their ability to construe research as an inducement requiring regulation.
The Financial News article quotes the EC as saying: “It’s absolutely necessary to create a clear definition of what an inducement is, so that this ban is applied in the correct way. That’s the reason why Esma, in its technical advice, introduced a mechanism for how research has to be dealt with and paid for so as to not be considered an inducement. I think that if now, we say that research is not an inducement, then that would be a change of policy. That might be what Parliament and the Council would like, but it would require a change in level one text.”
As we noted in an earlier article, there are sixty members of the the European Parliament’s Economic and Monetary Affairs Committee, so three vocal opponents to the language banning research commissions is not necessarily representative of a majority of the committee. The Financial News article reports that other members of the committee, including a representative from Germany, expressed support for the EC’s position and frustration with committee members, especially leading critic Kay Swinburne, for their opposition.
Our Take
This does not bode well for the cautious optimism we discussed Monday that client commissions will be permitted to fund the new Research Payment Account (RPA) regime. MEPs who oppose a ban on research commissions would have to vote against MiFID II in its entirety, which a majority of Parliamentarians are unlikely to do. Moreover, it now appears that opposition to the language was limited to a handful of MEPs rather than the majority of those on the Economic and Monetary Affairs Committee.
The remaining shreds of optimism will need to cling to other avenues to sway the EC. Market participants have expressed hope that the UK government might subvert its financial market regulator, the Financial Conduct Authority (FCA).
This view was given life by a leaked letter dated May 22nd, signed by the UK Treasury as well as the French and German governments questioning whether investment research is in fact an inducement and even belongs in the MiFID II regulation. As we have reported earlier, those who have seen the letter view it as a technicality rather than substantive opposition.
Optimists will also pray that the high-powered lobbyists under the employ of large investment banks will be able to sway senior EC officials directly. (Large asset managers may also be lobbying, but our sense is that they are largely resigned to the new regime at this point.) Since the EC members tasked with drafting the language appear to be unwilling to amend the language, lobbyists will need to convince senior EC staff of the need for changed language.
It now appears that the final rules will follow an earlier draft of the pending rules leaked in April which made no changes to the language prohibiting a link between research payments and commissions. Adding salt to the optimists’ wounds, the notes to the session discussing the leaked rules (see page 4 under heading ‘Investor Protection’) show that only one member raised the issue of whether commissions should pay for research. Hardly major opposition…
The bottom line is that it is looking very grim for the chances of averting a ban on research commissions.