Two years after MiFID II and MiFIR started to apply, the MiFID review process has begun, with both the European Commission and the European Securities and Markets Authority (ESMA) having recently published consultations on the framework.

European Commission consultation

The European Commission has launched a public consultation on the review of the MiFID II/MIFIR regulatory framework.  This consultation uses a questionnaire format divided into two main sections.  The first section covers general questions on the overall functioning of MiFID II/MiFIR, with the second section covering specific questions on “priority” and “non-priority” topics (see below). Continue reading

FCA review of MiFID II research unbundling rules

MiFID II overhauled the way in which firms pay for, price and provide research – in large part, aiming to reduce conflicts of interests and ensure that firms are acting in the best interests of clients. Sell-side brokers are now required to unbundle research from other services (notably execution) and buy-side firms are required to purchase research from their own resources or by using a separate research payment account (RPA) funded by clients.

In the lead-up to the introduction of MiFID II, these proposed changes were an area of key focus and hot debate. Over a year later, the FCA has published its findings following a review of the implementation and impact of those new rules.

Overview of the FCA’s findings

In general terms, the FCA found that there had been “positive changes in behaviours by firms” in response to the new MiFID II rules and that, overall:

  • most firms have absorbed the costs of research themselves, resulting in significant savings for investors;
  • buy-side firms are still able to access the research they need – the FCA found only “limited evidence of a decline in research quality and coverage“;
  • buy-side research evaluation models and sell-side pricing models differ – the FCA expects firms to “refine models to ensure they are acting in the best interests of their clients” and will monitor the market for “potential competition concerns“; and
  • some firms are unclear about how the new rules apply to certain circumstances, eg in relation to trade association events, marketing research services or contributions to consensus forecasts – the FCA clarified its expectations in its findings.

Some key areas of attention

The FCA provided more detailed discussion on a number of specific areas in its findings. Some of the key areas are addressed below, although firms affected by the research unbundling rules should consider the FCA’s findings in full.

  • Evaluating and deciding payment for research: the FCA identified various more “sophisticated” models that firms are using for valuing research and deciding payments for research, and sets out a summary of some of those models in its findings. Buy-side firms may find these examples instructive when refining their research valuation models.

The FCA identified that some asset managers are focussing “too much on measuring quantity, using a fixed rate card with prices based on volume” rather than focussing on quality, and stressed that:

Assessing research quality and value requires judgement. As long as firms can show their approach is rational and consistent, we would not expect them to assign specific payments to every single interaction, or justify small variations between similar providers. But we would query extremes in payments or other patterns that have little or no clear justification. This could indicate that research providers are offering inducements or that asset managers are not sufficiently managing conflicts of interest.

  • Clarifying non-monetary benefits: the FCA found that some asset managers were taking cautious approaches to the inducements rules, for example “blocking all marketing material or free trials from new research providers“, “not accepting ‘issuer-sponsored’ or house-broker research“, or “refusing to attend trade association member events“.

Although inducements should always be assessed on a case-by-case basis, the FCA clarified its general expectations in these areas. In particular:

    • trial periods are acceptable as long as they “meet the relevant conditions“;
    • issuer-sponsored materials are generally “acceptable ‘minor’ benefits“;
    • reasonable marketing material, or attending ad hoc meetings where research products are promoted” is acceptable, and “[s]erving or accepting refreshments at events like these does not breach inducement rules, though unduly lavish hospitality could“; and
    • “[g]enerally, trade association events can be treated outside the inducements framework” – the FCA emphasised that members typically pay their own fees to attend such events.
  • Delegation arrangements: as part of its review, the FCA also identified that some buy-side firms did not have appropriate control over external services providers for delegation or outsourcing arrangements, and that some firms were making the external services providers “completely responsible for compliance” without retaining oversight – which is not consistent with the FCA’s rules on outsourcing. The FCA stressed that it expects “firms delegating portfolio management services to seek an equivalent level of client protection under delegation arrangements as those required by MiFID II“.
  • Intragroup research sharing: the FCA found that firms are not routinely sharing research between entities in the same corporate group. Cases where the FCA did identify research sharing typically involved limited material and / or research flowing to and from entities (ie research flows ‘both ways’). The FCA considers that this is reasonable, as long as it does not influence how firms place orders or their ability to act in the best interests of their clients.
  • Competition concerns: various firms, in particular independent research providers (IRPs), have raised competition concerns. Some IRPs indicated that multi-service firms were cross-subsidising research and other firms were taking an over-cautious approach to the new rules (including limited take-up of the FCA’s 3 month trial period for research). Some IRPs indicated that, as a result, they are finding it difficult to compete. The FCA noted that this would be an area of focus in its further work in 12 to 24 months’ time.
  • FCA’s 3 month trial period: importantly, the FCA indicated that it would not extend the 3 month trial period to 6 months. Some IRPs had suggested the 3 month period was too short – but the FCA found that there was not sufficient evidence that extending it would “materially improve uptake by asset managers” and that, in any event, extending the trial period might stop the benefit from being classified as “minor” (for the purposes of the new ‘minor non-monetary benefits’ rule).

Next steps

The FCA acknowledged that implementation of the research unbundling rules is still in its early stages and highlighted that it intends to undertake further work in 12 to 24 months’ time. In the meantime, firms should consider the FCA’s findings – in particular, in relation to research valuation and pricing models – and ensure they are acting consistently with the FCA’s expectations. Implementation of the research unbundling rules by firms – in a way that is consistent with the FCA’s expectations – is likely to be a key focus of the FCA in the future.


Clive Cunningham
Clive Cunningham
Partner, Corporate, London
+44 20 7466 2278
Mark Staley
Mark Staley
Senior Associate, Corporate, London
+44 20 7466 7621
Harry Millerchip
Harry Millerchip
Associate, Corporate, London
+44 20 7466 6447

Regulators extend transitional direction powers in line with Brexit delay

The Financial Conduct Authority (“FCA”), Bank of England (“BoE”) and Prudential Regulation Authority (“PRA”) yesterday announced measures to extend certain UK-specific Brexit transitional relief provisions for a further six months until 31 December 2020, in line with the extension of Exit Day until 31 October. This is generally in line with industry expectations and does not signal any material changes to the regulators’ policy or approach. (It should be noted that these timelines are separate from the 3-year maximum period applicable under the (separate) Temporary Permissions Regime (“TPR”), which remains unchanged in terms of overall maximum duration).

The FCA has issued a statement confirming its intention to extend the proposed duration of the directions issued under its temporary transitional power (“TTP”) to the 31 December 2020, reflecting the six-month extension of Article 50. The TTP is intended to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement. For those areas covered by the TTP, firms do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit.

The FCA’s statement clarifies that other than the additional time, the FCA’s approach to the use of the TTP remains unchanged from that previously communicated. Firms are reminded, in particular, that certain obligations will not be covered by the TTP: these include some significant areas such as reporting under EMIR and the MiFID II transaction reporting regime, which will present particular challenges for EEA firms operating in the EEA under the TPR. The FCA reiterates that it expects TPR firms to use the additional time between now and the end of October to prepare to meet these obligations and confirms that it will publish further information before exit day on how firms should comply with post-exit rules.

The PRA and BoE have published a related consultation paper, which provides an update on the BoE and PRA’s approach to the TTP. The consultation also briefly explains and consults on the proposals to amend further certain regulatory requirements to take account of changes to EU law taking effect between March and October 2019. On use of the TTP, the PRA and BoE confirm, consistent with the FCA, that the proposed adjusted fixed end date for the TTP directions will be 31 December 2020, and that the overall approach to use of the TTP remains generally unchanged from the approach previously outlined by the PRA and BoE.

PRA-regulated firms within the scope of the TPR are reminded that for the most part, the TTP will not apply to obligations arising in consequence of their status change upon entering the TPR. The PRA and BoE are also consulting on proposals to fix deficiencies arising from the UK’s withdrawal from the EU and to make consequential changes in light of the extension to the Article 50 period (in order to deal with EU binding technical standards (“BTS”) entering into force between March and October 2019). The PRA does not expect material changes to be required to address this. Changes required to take account of EU laws and regulations other than BTS remain the responsibility of HM Treasury, which is separately engaged on this exercise.  


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Katherine Dillon
Katherine Dillon
Of Counsel, London
+44 20 7466 2522

MiFID II: Where do asset managers go from here?

The one year delay to the implementation of MiFID II provided the industry with some welcome respite from the seemingly unrelenting waves of regulatory reform. European regulatory implementation timetables are always tight but the original MiFID II timetable was proving to be unrealistic for both the regulators and the regulated. But time is quickly passing and the recent publication of all three Level 2 delegated legislation served as a sharp reminder that the asset management industry, along with others, is reaching a critical time on the road to the new effective date of MiFID II.

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UK: FCA and HM Treasury publish approach to UK implementation of MIFID II

The FCA and HM Treasury have published the first set of papers on the UK implementation of MiFID II:

  • FCA discussion paper “Developing our approach to implementing MiFID II conduct of business and organisational requirements” (DP15/3); and
  • HM Treasury consultation paper “Transposition of the Markets in Financial Instruments Directive II” (HMT consultation paper).

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MiFID II: ESMA Technical Advice and Consultation

The European Securities and Markets Authority (ESMA) published the following MiFID II Level 2 materials on Friday, 19 December:

The revised Markets in Financial Instruments Directive (MiFID II Directive) and Regulation (MiFIR) (together “MiFID II”) will apply across the European Union and member states of the European Economic Area from 3 January 2017.  For an overview of the new MiFID II regime, please click here for our earlier briefing.

This briefing highlights some of the key recommendations made by ESMA in its technical advice and helps to navigate the topics covered in the Consultation Paper.  Comments on the consultation must be submitted by 2 March 2015.

Useful documents:

  • A full list of the consultation questions is set out in the reply form for the consultation.
  • A list of the draft regulatory technical standards (RTS) and implementing technical standards (ITS) can be found here.
  • A timeline of key MiFID II dates can be found here.

To read our full briefing please click here.

UK: FCA publishes feedback on its thematic review of the use of dealing commission

Investment managers will be aware that the FCA has been holding discussions with the industry and conducting a thematic supervisory review (between November 2013 and February 2014) as to the controls that investment managers have over the use of dealing commissions for the purchase of research.  The Financial Conduct Authority (FCA)’s Discussion Paper (DP14/3) provides feedback on that review and policy debate on the market for research.   Continue reading

EU: Starting the clock – MiFID II, MIFiR, MAR, CSMAD, BRRD and DGSD published in the Official Journal today

The European Union’s EUR-Lex (Access to European Union law) website servers have been struggling today,  as firms across Europe tried to download the final form of the framework legislation for what the chairman of the European Securities and Markets Authority has termed the biggest overhaul of financial markets regulation in the EU for a decade.  Continue reading

EU: MiFID Review – phase two begins

The European Securities and Markets Authority (ESMA) is consulting on the implementation of the revised Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).  MiFID II and MiFIR are expected to come into application by end 2016/early 2017, and will apply across the European Union, extending also to member states of the European Economic Area under the European Economic Area Agreement.    For a more detailed briefing, click here

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