UK regulator the Financial Conduct
Authority (FCA) has toughened up its stance on using dealing commissions to pay
for research, following support for its new rules in MiFID II.
However, national regulators and brokers
are expected to fight back against the proposals, which would open the way to full
unbundling of research and execution services in Europe.
In its latest review of dealing commissions
published last week, the FCA stated it welcomed European Securities and Markets
Authority (ESMA) proposals to require any significant research performed by
brokers on behalf of institutional investors to be paid for out of asset
managers’ own funds, rather than commissions.
"It is slightly surprising ESMA has
gone for such a tough stance on use of dealing commissions to pay for research
as the issue hasn’t been on the regulatory agenda outside of the UK,"
commented Richard Balarkas, founder of Quendon Consulting and former CEO of
"The significance of the FCA aligning
itself with ESMA is that it has now clearly declared a preference for full
unbundling, and the initiative now has cross-border momentum. "
An FCA policy statement published in May
stopped short of fully unbundling research payments from commissions, instead
suggesting institutional investors should ensure they are aware of the costs of
research, set budgets and ensure the research they buy with client commissions
is of a high standard.
Later the same month, ESMA published its
first consultation papers on MiFID II, stating that asset managers should use
their own cash to pay for any significant or bespoke research they receive.
Tom Conigliaro, head of trading services at
data provider Markit, said, "The FCA might not have gone down this path
alone because of the risk of damaging competitiveness and creating regulatory
arbitrage, but ESMA's strong stance will give the FCA confidence in taking a
Lack of European support
However, the two regulators are likely to
face an uphill struggle to get new rules on dealing commissions agreed across
Europe due to the lack of support for unbundling on the continent.
“The FCA has outlined some options for full
unbundling, but I think it will remain fairly cautious due to the potential for
the UK to remain competitively disadvantaged if this isn’t implemented across
Europe,” explained Rob Boardman, CEO of agency broker ITG Europe.
He added that lobbying from firms that
currently benefit from the bundled execution and research commission model
alongside a lack of support among national regulators in Europe could lead to
ESMA’s proposals ultimately being watered down.
Kish Desai, head of sales for AQX, a Germany-headquartered
agency broker, said, “There will be a big push back on this. We’ve been talking
to regulators in Germany, Austria and other European jurisdictions and many
simply haven’t even looked at reforming the bundled commission model prior to
the MiFID II consultation.”
The FCA has steered clear of proposing any
new rules at present, instead saying it would await the outcome of ESMA’s consultations
on the regulatory technical standards for MiFID II.
If a fully unbundled model is adopted
across Europe, it could have significant ramifications for both the buy- and
sell-side. Desai said that while overall the move is positive for agency
brokers, it could see commission sharing agreements (CSAs) become redundant or
even banned if the buy-side were prohibited from buying non-execution services
with commissions, which may also hurt independent research providers.
“Independent research providers have it very
tough already but can ensure they get paid for their research via CSAs,” he
said, “but if CSAs are effectively banned by ESMA then those firms might
struggle to get asset managers to agree to pay for expensive research when that
money has to come from their management fees.”
However, Conigliaro, who is responsible for
Markit’s Commission Manager CSA aggregation tool, is more positive that the
industry can adapt. "If these proposals are adopted, then you could see
CSA products evolving into tools that focus on allocation of research payments,
valuing that research and enabling firms to manage their research
ESMA’s current consultation on MiFID II is set
to close on 1 August, with results expected to be published towards the end of
2014. A concurrent discussion paper on regulatory technical standards also
closes on 1 August.