MiFID II

With MiFID II now business as usual, the FCA has announced its first review: the application of the new research rules. The focus on this area makes sense in the context of the FCA’s drive to eliminate conflicts of interest – which may occur when research or corporate access is bundled as part of a wider service. But what, specifically, do firms that receive research need to do in order to satisfy the FCA?

Under MiFID II, investment managers are no longer permitted to accept free research. They must either pay for it out of their P&L or establish a client research payment account (RPA); the latter option replaces the old commission sharing agreement model.

In practical terms, we believe that the FCA will be looking to see whether firms have established a strong set of controls and processes in the following six broad areas – and whether the firms are adhering to those controls and processes.

  1. Policies and procedures: detail how you deal with the research you receive – including unsolicited research material (point 4).
  2. Using RPA accounts: be able to show that you procure and charge for research appropriately, that the purchases are justified, and that clients have consented to the arrangement.
  3. Receipt and valuation of research: provide an audit trail showing that you pay a fair and consistent price for research material, and that research costs are kept separate from execution costs.
  4. Refusing unsolicited research: ensure all research material sent to your employees is either paid for or declined.
  5. Treating non-EU research correctly: demonstrate that research is properly handled even where you’ve delegated some investment management responsibility outside the EU.
  6. Corporate access: pay for this through a separate P&L account, not the research budget; don’t charge it to clients.

Your firm should be taking action now to ensure that it complies with the new research rules, and specifically that your controls and processes will stand up to FCA scrutiny in these six areas.

We’ve explained more about the practical implications of the research rules in a brief paper. Please contact us to request a copy.

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