Before the implementation of MiFID II Research Unbundling Rules, brokers and asset managers could freely include the costs of third-party investment research into their offering, without having to disclose it. Now this is no longer possible in the UK and Europe.
Under the new rules brokers and asset managers must create research budgets and either charge the costs of research to clients via pre-agreed Research Payment Accounts (RPAs) or absorb the cost of research themselves (i.e., against the firm’s profit and loss). The rules apply to all asset classes.
For a deeper background download the CFA report here.
A REGULATION AIMED TO FIX THE LACK OF PRICE TRANSPARENCY FOR END CLIENTS IN RELATION TO BOTH RESEARCH AND EXECUTION COSTS
Firms carrying on MiFID business are now prohibited from paying to or accepting from any party (other than its client or a person on behalf of its client) any non-monetary benefit in connection with the provision of an investment services or ancillary service.
At a high level, the options available to managers appear simple enough at face value:
- Pay for the research yourself from own funds; or
- Agree with or disclose to investors a budget for the purchase of research and establish a research payment account to administer the payment of those fees.
Requirements and obligations under MiFID II Research Unbundling Rules
The account must only be funded by a specific research charge to clients, which must only be based on a research budget set and regularly assessed by the firm, and which is agreed with, and published for the benefit of, clients.
The obligation on firms to regularly assess the quality of the research purchased based on robust quality criteria.
An obligation for firms to agree with clients not only the research charge that has been budgeted by the firm but also the frequency with which the specific research charge will be deducted from the resources of the client over the year.
A need to establish appropriate controls and senior management oversight to ensure the research budget is managed and used in the best interests of the firm’s clients.
A requirement to implement a written policy setting out how the firm will comply with all elements of the rules relating to the operation of the research payment account, and, in the case of an AIFM or UCITS ManCo, a requirement that a written statement of how the firm will comply with all elements of such rules must be published in the Prospectus of the fund.
Bundled brokerage arrangements to be unbundled from transactions costs
Firms receiving research were required to either pay for research themselves or pass the cost on to clients as a separate charge, to ensure that clients had better price transparency. The FCA’s review of the market, undertaken after MiFID II’s commencement, found that firms now absorb the costs rather than pass them onto clients. However, concerns about the impact on research coverage and quality have led the FCA to propose the relatively limited changes described further below (later accepted and in force from 01/03/2022).
| FCA changes | EU “Quick Fix” changes |
| Research into SMEs below a market capitalisation of £200 million* (for the 36 months preceding the research) exempt from the inducement / investment research rules * The £200 million threshold would be assessed for the 36 calendar months preceding the provision of the research | Research into SMEs below a market capitalisation of €1 billion (for the 36 months preceding the research) exempt from the inducement / investment research rules |
| Fixed Income, Currencies and Commodities research exempt from the inducement / investment research rules | No equivalent |
| Research provided by independent research firms (not engaged in execution services or part of a group that offers execution or brokerage services) exempt from the inducement / investment research rules – CHANGED TO research provided by research providers who do not provide execution services and are not part of a group that includes a firm offering execution services | No equivalent |
| Research made openly available (e.g. not requiring a log-in, sign up or submission of user information) exempt from the inducement / investment research rules | No equivalent |
| Removal of obligation for execution venues to make RTS 27 AND RTS 28reports (quarterly execution quality metrics) | Obligation to make RTS 27 reports suspended for two years from the end of February 2021 |
| Removal of obligation for firms executing and transmitting client orders to make RTS 28 reports (annual report listing the top five execution venues where they have sent client orders in the preceding years, and a summary of the execution outcomes achieved) | No |
Exceptions to the Research Unbundling Rules
In the context of investment research, there is an exemption under the new rules for any third-party research that is received by a (MiFID) firm providing investment services or ancillary services to clients where that research is received in return for either:
- direct payments by the firm out of its own resources,
- payments from a separate research payment account controlled by the firm (provided that the firm meets certain requirements relating to the operation of the account).
- Costs and charges disclosures
- Exemption for professional clients/ECPs, except where portfolio management and investment advice are provided: detailed costs and charges disclosures to professional clients and eligible counterparties are removed, except where providing portfolio management or investment advice (aligning with the EU MiFID II Quick Fix).
