U.K. Plans to Outdo Neighbors on MiFID While Heading to EU Exit

  • FCA issues tough proposals on the uses of investment research
  • Ashurst’s Cant says FCA plan amounts to gold-plating EU rules

The U.K. is planning to surpass its neighbors in imposing tough new rules on investment research, even as the country heads for the European exit.

The Financial Conduct Authority proposed stricter rules for how brokers can woo investment firms with research and other inducements as the U.K. gears up to implement the European Union’s sweeping market-rule overhaul known as MiFID II. Keeping British rules close to those in the EU may prove crucial if U.K.-based banks are to retain access to the single market.

Under the proposals issued on Thursday, the FCA would extend a ban on accepting any “monetary and non-monetary benefits from third parties,” including investment research, across the fund management industry, from hedge funds to mutual managers. Only a narrow set of research products, such as commentary on market moves or company results, could be exempted.

“There are a number of ways of interpreting the rules and they have, for example in research, taken the more onerous one,” said Tim Cant, a lawyer at Ashurst LLP in London. “In ordinary man’s street-speak, that is gold-plating.”

EU nations have until July to convert MiFID II into national law. The new rules come into effect in January 2018. Sticking close to the EU directive may give firms in the City of London the best shot at maintaining single-market access, especially if the U.K. ends up favoring a clean break from the EU to secure the goal of tougher immigration controls.

Investment Banks

The MiFID II overhaul will lead to $2.1 billion in technology costs next year, according to an estimate published Thursday by IHS Markit and Expand, a consultancy owned by the Boston Consulting Group. The estimate covered the top 40 investment banks and top 400 asset-managers.

To qualify a non-monetary benefit as “minor” requires “a consideration of the substance of its content,” not just formalities such as how it’s labeled or who produces it, according to the FCA’s proposal. Making that judgment is the responsibility of the recipient, it said. The rule applies to equities as well as fixed income and other non-equity instruments.

“It is for the receiving firm to make their own assessment, and if material does appear to be substantive, value-added research, and so is not minor in nature and scale, a firm will need to either pay for it under the new research requirements or not accept it,” it said.

‘Substantive Interpretation’

The tough approach is of a piece with the FCA’s wider philosophy, said Jonathan Herbst, a partner at Norton Rose Fulbright.

“It’s exactly what you would expect from them, which is a thorough piece of work colored in places by their own policy angles, and research payment accounts is a particularly good example,” he said. “They are following their particular policy line, which is a really substantive interpretation of what the provisions mean. It’s not your minimalist interpretation.”

The FCA is seeking to ensure investment firms account for research as a “fixed, predictable cost” that isn’t linked to execution costs or paid for through cross-subsidy. It wants research to be either a “core management cost” or to be fully transparent to investors to end any potential conflict of interest, and is looking forward to the emergence of “a transparent, priced research market,” it said.

“Firms who provide both execution and research services will have to identify separate charges for their services,” it said. “This means a broker will no longer be able to charge a bundled execution rate, which the portfolio manager agrees and passes on to their clients as trading costs, in return for unpriced research goods and services provided as a benefit to the manager.”

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