FCA Confirms Changes to MiFID II Rules on Research Plus an End to RTS 28 Reports on Best Execution
The FCA published Policy Statement PS 21/20 on Changes to UK MiFID’s conduct and organisational requirements on 30 November 2021, confirming the FCA’s proposals as set out in Consultation Paper CP 21/9.
New exemptions to the definition of research
The new FCA rules remove certain categories of research services from the inducement rules in COBS 2.3A by treating them as “minor non-monetary benefits.” In other words, these can be provided “free of charge” or bundled with execution services without being considered an inducement (which would be prohibited). The exempt categories are:
- Research on listed and unlisted small and medium-sized enterprises (SME’s) with a market capitalisation below £200 million.
- Research focusing on fixed income, currency, and commodity (FICC) investment strategies.
- Research from independent research providers who are unconnected, either directly or with other group entities, to execution or brokerage services.
- Written research that is openly available to other firms or to the general public.
Macro-economic research not part of FICC exemption
In a move not signalled in the original Consultation, the FCA have clarified that macro-economic research may not be included in the FICC exemption and hence should still be treated as a research service that must be paid for. The FCA’s reasoning is that macro-economic research can explicitly or implicitly suggest an investment strategy. It can often support equity strategies as well as FICC.
We view this distinction as unhelpful: macro-economic research comprises a very large part of research to support fixed income, currency, and commodity strategies, and disentangling these elements may be virtually impossible, in practice. We are already aware of one large investment bank proposing to continue with existing commercial arrangements in these sectors.
Timing of revised rules on research
The new research exemptions apply from 1 March 2022. For firms operating a research budget on an annual basis, this introduces an awkward two month period before the relevant categories can be excluded.
End of best execution reports
The FCA has confirmed that the following disclosure requirements will no longer apply:
- The obligation on execution venues (including brokers) to provide quarterly metrics on execution quality (RTS 27 reports).
- The obligation on investment firms carrying out portfolio management or the reception and transmission of orders to provide annual reports on execution outcomes, including the top five execution venues used in each asset class (RTS 28 reports).
The removal of these obligations came into effect on 1 December 2021. Hence, firms due to make the next set of RTS 27 and 28 reports in April 2022 are no longer required to do so. Whilst not explicitly referenced in the FCA’s Policy Statement, we consider that any prior disclosures from previous years can be removed from firms’ websites.
Implications for UK/EU regulatory divergence
The FCA appear to have put very little weight on any perceived benefit from maintaining equivalence with EU MiFID rules. A prime example is the FCA sticking with the £200 million market capitalization threshold for smaller companies research, in contrast to the EU’s €1 billion. In the FCA’s view (and this was supported by statistical analysis in their original Consultation), it is in this much smaller population of companies where the problems with research coverage are really apparent. We believe this pattern of regulatory divergence will continue for the foreseeable future.
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 For listed companies, the market capitalisation threshold is calculated by reference to year-end quotes for the preceding 36 months before the provision of research. For unlisted companies, firms may reasonably rely on third-party estimates of market capitalisation.
 “Openly available” means no barriers or conditions to receiving it, for example through log-ins or submission of user information before access is granted.