MiFID II supervisory review: FCA has low-priced research in its sights

03 April 2019

The research unbundling reforms under MiFID II have been a widely debated topic across investment banking and asset management sectors in recent years. These reforms have represented a major change for industry, creating a number of challenges and important strategic questions for firms. With the Financial Conduct Authority due to publish the output of its supervisory review on this topic in Q2 2019, firms should prepare themselves for some strong messages and ongoing scrutiny in relation to low-priced research models.

To recap, under MiFID II asset managers must pay for third-party research separately from other services. The idea is to ensure that asset managers no longer accept free research as an inducement to channel their trading execution business towards certain brokers. Before MiFID II, asset managers would effectively pay more for the same amount of research as they increased their trading volumes and would pass those costs onto their investor clients.

The FCA clearly has low-priced research models in its sights. In a recent speech, the regulator’s CEO, Andrew Bailey, signalled that the pricing of so-called ‘all you can eat’ offerings - whereby research on a variety of areas is bundled together into a single package - are prone to falling short of its expectations. This reinforces previous messages from the FCA, including in its 2018/19 Business Plan and at the Asset Management Conference in July 2018.

Low-cost research offerings will place both producers and recipients of research at risk of close scrutiny by the FCA. Banks and asset managers should ensure that pricing structures are not so cheap that they call into question whether research is genuinely divorced from trading. Firms opting to pursue such pricing strategies must carefully assess, on a case-by-case basis, whether research could effectively be deemed an inducement and, therefore, seen by the regulator as inconsistent with the spirit of the reforms. Crucially, it should not be assumed that a particular pricing strategy is acceptable in all contexts - the specifics of the situation will be vitally important. Firms will need to get comfortable that they are able to robustly defend their judgements on pricing to the regulator.

Sell-side firms must also ensure that pricing isn’t so low that independent research providers and lower tier investment banks struggle to compete. Such predatory pricing models will raise alarm bells from a competition perspective, and will be at the forefront of the FCA’s thinking given its competition mandate.

And we shouldn’t assume that the FCA will shy away from enforcement action in this area if it finds clearcut examples of wrongdoing. The reforms are a major change aimed at addressing what EU regulators believed to be a significant shortcoming in previous market practice. So it is perfectly plausible that the FCA will look to make an example of firms with pricing strategies in clear breach of the spirit of the rules. At the very least, and based on the FCA’s planned response to its recent MiFID II and PRIIPs cost disclosure review, firms can expect the findings on research pricing to trigger the beginning of more targeted supervisory investigations into firms with questionable approaches.

As we await the FCA’s supervisory output, the more prepared firms will already be on the front foot, having progressed their internal post-implementation reviews. Firms that have not already done so need to get comfortable that their approaches to pricing and other key areas of the unbundling reforms will satisfy the regulator’s expectations. After all, the general tone of recent FCA communications in this space provides a strong indication that the reforms are here to stay, so firms should embrace the change rather than sitting back to await a knock on the door from their supervisor.


Lucas Penfold

Lucas Penfold | Manager, FS Risk and Regulation Centre of Excellence
Profile | Email | +44 (0)7483 407581



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