The UK’s Financial Conduct Authority (FCA) is hoping to publish the long-awaited conclusions of its review into the implementation of the EU’s Markets in Financial Instruments Directive (Mifid II) requirements within the next two weeks, Euromoney understands.
The results will come just weeks after the first anniversary of the regulation, which was January 3.
The FCA announced its intention to conduct a review into Mifid II at its annual asset management conference in June 2018, and expected it to take about six months.
An FCA spokesperson would not comment on the timing of the publication of the regulator’s conclusions, but says in a statement: “We have conducted a substantial amount of work in this area, including to understand and clarify our requirements and how effectively they have been implemented. Where necessary, we have already sought improvements.”
The expectation among consultants is that the review will lead to revisions to the supervisory regime, although these could take some time to be put in place.
The review was designed to address how firms on the buy and sell side were applying the inducements regime of Mifid II into the provision and consumption of research.
Under Mifid II, investment managers must pay explicitly for substantive research covering numerous asset classes to show that the research is not being provided as an inducement when it comes to trade execution.
Likewise, execution charges from sell-side firms must only cover the actual costs of execution.
The FCA was the prime driver of the application of the inducements regime to the provision of research, making it unsurprising that this should be the focus of its review.
The regulator has made clear, however, that sell-side firms’ responsibilities go beyond merely charging. Pricing must be transparent and not unduly low. The manner in which some banks have opted to approach the provision of research in huge bundles, for instance, might well not survive this review unscathed.
“There has been a broad spectrum of responses to the question of which charging model to adopt,” says Christian Krohn at financial services regulatory consultant Bovill. “But even if they meet the letter of the law, whether they all meet its spirit we are soon going to find out.”
At the time the review was announced, FCA official Mhairi Jackson was quoted as saying that “all-you-can-eat research offerings are potentially more prone to fall short of the spirit of the Mifid rules”.
Pre-Mifid II, the FCA maintained dealing-commission rules that applied to cash equities only and were designed to prevent firms using dealing commissions to effectively purchase other services such as corporate access.
That makes it likely that much of the regulator’s attention in the review has gone into areas such as fixed income, which were previously outside its scope.
However, given the Mifid II requirement for research payments made by end-investors to investment management firms and by those firms to research providers to be conducted through a robust research payment account mechanism, the FCA is likely also to have spent time focusing on the running of such accounts now that a year has passed.
Bovill’s Krohn argues that the jury is still out on whether the regime has produced good results; that largely depends on what kind of firm you are and who your clients are.
One aim of the new regulation was to have less but higher quality research – an aim that is of dubious value in itself, given the widespread view that more information is better than less.
However, in any event, all-you-can-eat bundles hardly lead to that result, and neither does the exemption of research deemed so insubstantial that it need not be paid for.
If there is one constituency that has without doubt suffered from Mifid II it is small and mid-cap brokers, many of whom are now struggling to make ends meet and are having to cut back their services accordingly.
Krohn notes it is quite possible that the regulations as they stand might lead to an impact on the cost of and access to capital for small and medium-sized enterprises – something that might only change when it has become severe.
“There is little immediate scope for relief to those brokers covering small and medium-sized enterprises, but that could change after Brexit and especially in the case of a no-deal Brexit,” says Krohn.
“In that scenario, there may be a desire to take a slightly more pragmatic line.”