MiFID II research: will your firm be ready?
28 March 2017
With MiFID II’s January 2018 deadline fast approaching, many investment firms face significant challenges with the implementation of their programmes and need to start thinking prioritisation The Financial Conduct Authority (FCA) estimated £1.5bn was spent on investment research in 2012 however, due to the bundling of commission payments to include execution and advisory services, end investors had no ability to value the service being provided due to a lack of transparency on the amount being spent on research. This was a significant concern for the FCA and, as a result, the regulator included investment research in its top supervisory priorities for MiFID II along with transaction reporting, best execution and product governance.
Investment firms are starting to acknowledge that delays to the implementation of their research programmes won’t just jeopardise MiFID II compliance but may also lead to material revenue impacts for their businesses. Buy-side firms are now engaging with research providers to plan for how they will meet their own MiFID II obligations by the deadline.
The definition of research has expanded significantly under MiFID II to include content from all asset classes and no longer just applies to research produced by independent research teams. Many examples of front office sales trader content, such as desk commentaries, should also be considered research unless it meets the definition of a minor non-monetary benefit. To meet the requirements, investment firms need to take a number of actions.
Sell-side firms providing investment research should:
- Categorise the content they provide to clients against the MiFID II definition of research.
- Understand the cost base for the production and dissemination of this content.
- Develop a pricing model for research and provide clients with unbundled advisory and execution prices.
- Ensure their firm does not induce clients by providing research below cost.
- Implement systems and processes to allow clients to pay for research either by
- Direct payment out of the firm’s own resources.
- Commission based payments via a research payment account.
- Develop controls to halt the dissemination of research should clients stop paying for the content.
Buy-side firms that receive investment research:
- Must pay for research to demonstrate to their clients and regulators that they have not been induced to trade.
- Understand that the obligation ultimately falls on the buy-side to determine what content, based on the substance, should be defined as research. Sell-side firms labelling content as sales commentary does not provide a justifiable exemption if the content could be deemed as research.
- Must set a budget for research and ensure payments for content are reasonable and justifiable considering the quality of the content.
Investment firms will need to consider weighing the distinct investment research revenue stream against the organisational cost of providing research going forward. As such, we expect there to be some ratification in the industry as some firms decide not to provide research in areas where they can’t price it competitively. Other firms may try to simplify their research offering by reducing the scope of the content they provide or reducing operational complexities for example, by only offering direct payment solutions. We expect some firms and independent providers to see the opportunity to maximise their revenues streams and grow their specialist research offerings.
Firms must ensure they are engaging with their clients and making key business decisions now for how they want to operate in the future. Sell-side investment firms should acknowledge that delaying business decisions or developing implementation plans that do not leave time for User Acceptance Testing (UAT) and client on boarding prior to the MiFID II deadline could have an impact on their clients and that may result in material impacts for their firms.