Investors unclear on FCA’s changes to MiFID II research rules

Written by Michael Griffiths

28/06/2022

The FCA’s changes to MiFID II research rules have left investors unclear as to how they implement them practically, the European Leveraged Finance Association (ELFA) has warned.

Rule changes by the regulator took effect in March this year with the primary intent of increasing the availability of research on small and medium enterprises.

With this aim, the FCA confirmed that certain exemptions to the MiFID II rules concerning explicit investor payment to brokerages for research and corporate access, including on SMEs with a market capitalisation of less than £200m and third-party research on fixed income, currency and commodities (FICC).

The ELFA said that such moves are “generally welcome”, but warned that differences have resulted in dual operating models in which firms must consider what fixed income research is exempt, and what they must still pay for.

According to the ELFA, this lack of clarity, coupled with limited buy-side engagement with brokers, has “hindered” investment firms’ understanding of the new rules. The trade association also highlighted that multi-jurisdictional businesses may find it difficult to discern if they are in compliance with Europe’s implementation of MiFID II, which may differ from the FCA’s rules.

CEO of the EFLA, Sabrina Fox, said: “Many investment firms are struggling to understand the practical implications and related changes that will result from the FCA’s disapplication of the MiFID II research rules.

“Firms must be vigilant in examining the practical aspects of the rule changes to ensure that they are in compliance, but also to realise the most benefits where possible.”

The ELFA has recommended that firms discuss with their research providers how much FICC research would be considered “free” and a minor non-monetary benefit.

To date, some brokers have altered their financial models and fees, while others have not, the ELFA added. The trade association has also recommended that firms determine their brokers’ respective approaches and negotiate terms.

Before changing research agreements, individually managed accounts with UK entities must consider any changes that they may need to make.

“With these changes being relatively new, the landscape may continue to adapt, and firms must be aware of these practical changes in order to manage their relationships with brokers effectively,” Fox added.

“We will continue to monitor the impact on investment firms to help our members identify and navigate any further implications.”

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