The European Securities and Markets Authority (ESMA) has recently published a consultation seeking feedback (Consultation) on draft technical advice to the European Commission on proposed amendments to the EU Markets in Financial Instruments II (EU MiFID II) Delegated Directive (Delegated Directive). The Consultation follows changes introduced by the EU Listing Act (Listing Act).

Background 

Historically, the EU MiFID II required EU-based investment firms (including EU asset managers) to pay for investment research using their own resources, or via a separate research payment account funded by their client(s). In 2021, EU Directive 2021/338 amended EU MiFID II to allow EU investment firms to bundle payments received for the provision of execution services together with research on EU-listed issuers whose market capitalisation did not exceed EUR 1 billion.

Under the Listing Act, the joint payment for execution services and research will become available to EU investment firms irrespective of any EU issuer’s market capitalisation. On 6 June 2024, ESMA received a request from the European Commission to provide technical advice on the implementation of the amendments to a few EU directives and regulations, in light of the Listing Act. 

The Consultation 

The Consultation proposes changes to research and execution services payment provisions under the Delegated Directive. Most notably, the proposals in the Consultation would require EU investment firms to: 

1. use “robust quality criteria” when conducting their annual research assessments. ESMA notes in the Consultation that while this is an existing requirement under Article 13(1)(b)(iv) of the Delegated Directive, it will amend the current wording to clarify that this obligation is applicable to research in general, in line with the new Article 24(9a)(c) of EU MiFID II; 
2. compare, as part of their annual research assessments and where feasible, the quality, usability and value of the research used with alternative offers available from other research providers;
3. structure their methodology for remuneration in such a way that prevents the firm from paying substantially more than it would be paying if it was using another payment method. As an example, ESMA proposes a tiered tariff structure, where the ‘research part’ of fees per transaction decreases after a certain number of transactions or through a fee cap or regular monitoring and reconciliations; and
4. before entering into an agreement relating to research, ensure that the total charges do not impede the investment firm’s ability to comply with its best execution obligations.

Next Steps

The deadline for comments on the Consultation is 28 January 2025. ESMA aims to provide its technical advice to the European Commission by 30 April 2025. 

NOTE: We reference “EU MiFID II” throughout the foregoing as these changes only apply to EU investment firms; these changes will not be relevant to UK investment firms, and the UK’s post-Brexit version of MiFID II is not impacted by these changes, although the UK Financial Conduct Authority is currently consulting on transposing elements of the UK MiFID II rules into the FCA Handbook and may make changes to the UK version of these rules when it does so. 

The Consultation is available here.

Larry Wong contributed to this article