Regulatory Steps Toward Unbundling: Inexorable?


If we take a step back and view the sequence of regulatory events leading up to the impending European regulation requiring greater unbundling of research and execution, we get a sense of inevitability about the whole affair.  The current regulatory agenda is not new.  It has been building for fourteen years, ever since the Myners Report was released in 2001.   It is little wonder, then, that UK firms view unbundling with a certain degree of resignation.

Here are the major regulatory milestones leading up to the pending European legislation requiring greater unbundling of investment research from execution.

March 2001. A review of institutional investment in the UK conducted by Paul Myners[1] concluded that broker’s commissions were as large a cost to pension funds as management fees yet not as well scrutinized. From “Institutional Investment in the United Kingdom: A Review”:

“The review recommends that it is good practice for institutional investment management mandates to incorporate a management fee inclusive of any external research, information or transaction services acquired or used by the fund manager, rather than these costs being passed on to the client.”

April 2003. The UK Financial Services Authority (FSA, predecessor to the current Financial Conduct Authority) issued a consultation paper (CP 176) proposing to narrow the definition of what could be paid for with client commissions. The FSA also proposed that asset managers determine the cost of research paid with commissions and rebate an equivalent amount to customers’ funds.

March 2004. Investment Management Association (IMA) proposed a new commission disclosure system that it said would provide sufficient transparency at less cost than the FSA’s rebate proposal.

July 2005. After a series of iterations (PS 04/13, PS 04/23, CP 05/9) the FSA published final rules implemented in January 2006. The definition of eligible research was narrowed to research incorporating “original thought”, “providing new insights”, “intellectual rigour” and “meaningful conclusions”. In addition asset managers were required to make prior and periodic disclosure to clients of “the details of the goods or services that are attributable to the provision of research.”

November 2005. Fidelity agreed to give Lehman approximately $7 million a year for its U.S. stock research, and between 2 and 2.5 cents a share for trading. Fidelity subsequently reverted to paying for investment banking research with client commissions.


June 2006. European securities regulators agreed on the rules associated with The Markets in Financial Instruments Directive (MiFID), originally adopted in 2004. MiFID’s “best execution” requirements were construed to support the use of Commission Sharing Agreements (CSAs) to reduce the number of trading counterparties and apportion commission payments to research.

April 2009. An Oxera report commissioned by the FSA found that usage of CSAs had grown but that pension funds and other asset owners largely ignored the commission disclosures provided.

June 2011. EuroIRP, a trade association for European independent research providers, issued a white paper questioning whether corporate access met the FSA test for commissionable research.

November 2012. As a result of reviews conducted between June 2011 and February 2012, the FSA issued “Dear CEO” letters to asset managers requiring attestation that conflicts of interest were being managed “effectively and in compliance with FSA rules.”

November 2013. The successor to the FSA, the Financial Conduct Authority (FCA), issued a consultation paper (CP 13/17) stating that corporate access does not qualify as commissionable research and ‘clarifying’ the definition of commissionable research by requiring it be ‘substantive’. The paper also raised the possibility of the FCA supporting a full ban on paying for research with client commissions.

May 2014. The European Securities and Markets Authority (ESMA), the European-wide regulatory authority whose members are the financial markets regulators in each of the 28 member states, issued a 500-page discussion paper codifying the regulatory language associated with the MiFID II laws passed by the European parliament in April 2014. The draft proposed that broadly distributed, low value research be construed as a ‘minor non-monetary benefit’ and therefore exempt from MiFID II’s ban on third-party inducements but using client commissions to pay for any research of value would be banned.

May 2014. The FCA issued final rules (PS 14/7) banning commission payments for corporate access and tightening the definition of commissionable research. It added new language requiring asset managers to proactively value bundled services and prohibited payment for research not used. The new rules were implemented in less than a month (June 2, 2014).

July 2014. One month after implementing its new commission guidelines, the FCA released a discussion paper (DP 14/3) supporting a full ban on payment for research with client commissions. The position was prompted by a review conducted from November 2013 to February 2014, which reflected in the FCA’s estimation little improvement in the management of conflicts by asset managers, and by the FCA’s interpretation of ESMA’s draft MiFID II language.

December 2014. After receiving voluminous comment letters opposing a ban on research commissions, ESMA released revised technical advice which required asset managers to either pay for research out of their own fees or through a research payment account (RPA):

“The research payment account shall only be funded by a specific research charge to the client. The specific research charge shall:

  • only be based on a research budget set by the investment firm for the purpose of establishing the need for third party research in respect of investment services rendered to its clients; and

  • not be linked to the volume and/or value of transactions executed on behalf the client.”

Because ESMA’s discussion of the technical advice held CSAs in a positive light, industry participants, including national regulators from France and Germany, interpreted the advice as allowing CSAs to be used to fund RPAs.

February 2015. The FCA released a ‘feedback statement’ (FS 15/1) interpreting the ESMA technical language as a ban on research commissions, including CSAs. The paper also raised the possibility of the FCA going beyond the EC guidelines: “Depending on the form and content of the final legislation, we may also need to consider…whether it is possible and desirable to consider further detail to clarify our approach to implementing new requirements.”

April 2015. The European Commission (EC) issued a draft, subsequently leaked in Integrity ResearchWatch, which showed concessions on the budgeting process, allowing asset managers to notify clients of research charges rather than requiring approval, but no change in the language banning the linkage of research payments to client commissions.

June 2015. In a meeting with Members of the European Parliament (MEPs), representatives of the EC reportedly defended the ESMA technical advice banning research commissions. It appeared that MEPs opposed to a research ban were unable to effect changes to the pending rules.

Future milestones: The EC is expected to issue the final regulatory technical standards by the end of September and the European Parliament will need to approve the legislation. If the rules pertaining to research payments are issued as a directive, it will be up to the national regulators to draft implementing standards and the FCA would be expected to do so in December 2015. If the rules pertaining to research payments are issued as regulation, as is generally expected, then ESMA will draft the implementing standards, which is expected in the first quarter of 2016.  EU Member States are required to adopt MiFID II directives by June 2016 and the directives and regulation take effect January 2017.

Our Take

US firms are often shocked by the equanimity of those in the UK facing a radical overhaul of the payment process for investment research.  But we in the US fail to appreciate the long history behind the issue (as we often do generally).  From the UK perspective, the separation of investment research from client commissions appears to be only a question of timing.

There are still many details to be sorted.  The exact form of the new regulation is still pending and there is a chance, although it appears to be diminishing, that client commissions will be allowed to fund research payment accounts.  However, the direction of travel is crystal clear to those who have been watching the regulatory procession.

[1] Lord Myners is currently Chairman of Autonomous Research, an independent research firm with a trading desk paid primarily through directed commissions.


About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email:

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