The U.K. Financial Conduct Authority has published the outcome of its review of the research unbundling reforms implemented in the EU by the revised Markets in Financial Instruments Directive. MiFID II has applied across the EU since January 3, 2018. MiFID II restricts the payment or receipt of all fees, commission and non-monetary benefits ("inducements") unless these enhance the quality of service provided to a client, and do not impair an EU investment firm's duty to act in the best interests of its client. Any inducement that is a minor, non-monetary benefit is exempt from the limitation. Research provided by any third party (regardless of location) to an EU investment firm providing investment services or ancillary services will be regarded as an "inducement" and subject to the inducement prohibition, unless the research is received in return for either direct payment by the investment firm out of its own resources or payment from a separate research payment account (RPA). "Soft dollar" commissions are not allowed, unless these are done through an RPA. The rules have impacted buy-side and sell-side firms in the EU, as well as their non-EU counterparts.
The FCA's review found changes in the asset management and research market since firms implemented the rules. In particular, the FCA discovered that:
The FCA has provided some guidance in its detailed summary of the findings from the review, including:
The FCA acknowledges that firms' research arrangements are continuing to develop and therefore it intends to undertake further work in 12 to 24 months.
View the FCA's review outcome page.
You may like to read our client notes covering this important topic, available here.
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