MiFID II payments for research: Have the rules changed the behaviour of the buy-side?

September 26, 2018

FCA assess the impact of MiFID II by asking asset managers to provide detailed information

26 September 2018

Last month, the FCA made a Request for Information regarding Research Unbundling and other practices related to the new rules on inducements and paying for research which came into play eight months previously. Its stated objective was to assess the impact of MiFID II on the investment research market. Thirty asset managers were selected to provide information (to be followed by onsite visits to a smaller number of these firms).

The format of the Request was different from the (also recent) Questionnaire on Market Abuse Controls (see ACA alert here). This mostly elicited quantitative responses (either yes/no or selection from a list of options) and was criticised in some quarters for being partly or wholly “not applicable” for many of the firms selected.

The Research Request, on the other hand, is split in three parts:

  1. Data covering six month periods from 1 January 2016 to 30 June 2018. This is intended to analyse whether buy-side firms have changed their behaviour in relation to topics such as corporate access, execution counterparties and research providers.
  2. Questions seeking open-ended responses on how firms have changed their processes to address the key requirements of MiFID II’s new research regime.
  3. Documents which evidence the changes in process described in section 2.

What does the Request tell us about the FCA’s priorities?

Taken as a whole, the Request provides a helpful checklist for firms reviewing their implementation of MiFID II’s requirements. In our view, any gaps identified need to be built into firms’ monitoring programmes as a matter of priority. The Request also touches on adjacent topics, such as market abuse and best execution, which are also high up on the FCA’s agenda.

Here are some highlights from the three parts of the Request:

  1. Data (six month periods from January 2016 – June 2018)
    The thrust of these requests is to understand how firms’ behaviour has changed under MiFID II:
    1. Corporate access
      • Numbers of contacts with corporate issuers in a variety of scenarios, plus records of any payments made for corporate access services.
    2. Execution and research (split between equities and fixed income)
      • Numbers of counterparties, split between execution and research (or combination).
      • Volume (£) of execution commissions and research payments (including research commissions).
      • Estimated cost of internal research, and budget for external research.
      • Top 5 execution counterparties and top 10 research providers, by volume (£).
  1. Questions
    The FCA is seeking qualitative analysis on how firms are addressing some key issues:
    • Free research - are firms continuing to receive substantive research that they haven’t paid for and how are they seeking to prevent that?
    • Use of research - have firms changed the way in which they use different types of research (including non-substantive)?
    • Smaller company research - has the availability of research for small to medium sized enterprises (“SME”) changed, and has this had knock-on effects – e.g. on market liquidity?
    • Evaluating research – how are firms assessing the value of research both on an ex-ante and ex-post basis, and how is this linked to payment mechanisms?
    • Non-monetary benefits – how do firms distinguish between substantive and minor non-monetary benefits?
    • Research budgets – how do firms set budgets for research services and is this influenced by whether these are paid for through Research Payment Accounts (“RPA”) or by the firm itself?
    • Delegation arrangements – where investment management is delegated or outsourced to a third party manager, how are firms ensuring that outcomes are MiFID II-compliant?
  1. Documents
    The FCA’s document request can be read as a “must have” for record-keeping requirements in this high priority area:
    • Research policy – the processes that govern the budgeting and purchasing of research services, including assessing need, and how to allocate across multiple clients, and how it achieves value for money.
    • Research agreements – formal contracts with research providers.
    • Charging sheet – a “menu” of prices for different services (part of agreements).
    • Execution commissions – records of payments to each counterparty, covering pre- as well as post-MiFID II periods.

What happens next?

The Request was sent out on 1 August 2018 and firms were asked to provide replies by 7 September. Given the breadth and nature of the required responses, this will have been a difficult exercise for many firms particularly in assembling back data from records held in multiple locations and in a variety of formats.

However, this is not necessarily the end of the story as the FCA stated that it will follow up with onsite visits to a selection of the thirty firms.

We would also not be surprised if this thematic work was followed up in other segments of the asset management industry, as well as similar analysis of the behaviour of sell-side firms.

Key messages for investment managers?

The FCA’s mission to unbundle research payments from execution commissions pre-dated MiFID II and was a key priority from the reforms themselves. This is not likely to end any time soon! The FCA are determined to understand whether firms have truly embedded the required processes, and also that better value for money is being achieved on behalf of clients.


Without being alarmist, firms will also want to consider how well equipped they would be in responding to similar requests from the FCA (which appear to be becoming a fact of life for the way they supervise firms). The FCA is clearly intent on reviewing how well MiFID II is bedding down, and they expect firms to devote sufficient resources to achieving the same goal.

Previous Links

MiFID II for Asset Managers: Research Unbundling (4 Jan 2018)

A Rundown of the FCA’s 2018/19 Business Plan (13 Apr 2018)

For More Information

Please note that ACA offers thematic reviews on a number of MiFID II topics, including Research Unbundling. For more information about these, or the contents of this alert, please contact Anthony Wells, Martin Lovick, Alexios Bostantzoglou or your usual ACA consultant.