The U.K. Financial Conduct Authority has opened a consultation setting out proposals for allowing firms to use joint (bundled) payments for third-party research and execution services, subject to certain requirements being met. The proposals follow the recommendations made by the U.K. Investment Research Review in July last year, and which both the U.K. government and FCA accepted. This also follows the removal by the U.S. Securities and Exchange Commission of its temporary exemption on the need for U.S. firms to register as investment advisors if they sell research separately from execution. Responses to the consultation may be submitted until June 5, 2024. Depending on the scope of feedback received, the FCA is aiming to publish its final rules or guidance by the end of June 2024.
The FCA is proposing to introduce a new option that facilitates bundled payments for third-party research and execution services. The new option would be available alongside the existing methods of a firm making direct payments out of its own resources or from a separate research payment account.
Firms that opt to make bundled payments will need to satisfy certain conditions, including:
The FCA is also proposing to include short-term trading commentary and advice linked to trade execution to the list of acceptable minor non-monetary benefits for all payment options. This is intended to address any differences in access to research that could arise from short term trading commentary being provided by a U.S. broker-dealer, which may not be able to accept bundled payments, and an investment advisor, which would be able to accept bundled payments. We discussed the impact of the removal of the SEC's relief as well as potential solutions for U.S. broker-dealers in our client note, "MiFID II and the U.S. Investment Adviser Regime: The Latest U.K., EU and U.S. Developments on Inducements and Research Unbundling".
The FCA's proposals are similar to the EU's recently provisionally agreed amendments to the EU Markets in Financial Instruments Directive that form part of the Capital Markets Union Action Plan. The EU is also intending to make it possible for investment firms to choose whether to apply separate or joint payments for research and execution services with bundled payments being subject to compliance with requirements, many of which are similar to the FCA's proposed requirements. However, the timing on the application of the changes in the U.K. and EU is likely to be very different since the EU changes, once published in the Official Journal of the European Union, will need to be transposed into member state national laws 18 months later. The U.K. will most certainly implement its changes ahead of the EU.
It is noteworthy that the EU and U.K. are now both significantly adjusting the MiFID II rules on unbundling of research, which created enormous compliance and documentary disruption to industry, decimated the U.K. and EU sector for research (especially for smaller issuers) and had numerous other unintended consequences. Those consequences were repeatedly made known by market associations and firms to the EU legislators and the U.K.'s FCA in the run up to MiFID II being introduced. The FCA's new policy is essentially reversion to the status quo ante under U.K. regulation prior to the mistakes of MiFID II.
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