FCA Publishes Findings From Review of MiFID II Research Unbundling Rules

On September 19, the UK Financial Conduct Authority (FCA) published its findings from its review of unbundling of third-party research under the revised Markets in Financial Instruments Directive (MiFID II).

MiFID II, and the FCA’s related implementing rules, requires asset managers to pay for third-party research explicitly and brokers to price and provide services separately. In order to assess the implementation of such rules, the FCA undertook a review between July 2018 and March 2019 of 40 buy-side firms and conducted 10 visits to buy-side and sell-side firms.

The FCA identified changes in firm behavior in response to the MiFID II reforms, which suggests that the market has moved towards the intended outcomes of accountability and price transparency. However, the FCA also noted that research valuation and pricing are still evolving.

Overall, the FCA found that:

• most buy-side firms have chosen to absorb research costs themselves, resulting in savings for investors;

• most buy-side firms also can still access the research they need with no material reduction in research coverage, including for listed small and medium enterprises;

• asset managers’ research valuation models have different levels of sophistication, particularly in evaluating the quality of research. The FCA stated that it expects firms to refine their models to ensure they are acting in the best interests of their clients;

• there is a wide range of sell-side research pricing levels, which the FCA attributes to an ongoing process of price discovery. It will monitor this for potential competition concerns and will act if necessary; and

• some firms were uncertain about the application of the new rules to various activities such as attending trade association events, marketing research services or making contributions to consensus forecasts. The FCA has provided clarification of its expectations on these areas in its report.

The FCA intends to undertake further work in 2020/21 to assess the impact of the new rules, given that firms are still developing their arrangements and a market for separately priced research is still emerging.

The findings are available here.