Buy-side warned about free-trial periods for research under MiFID II

ESMA lays out rules for free-trial periods and investment firms are excepted to keep a record that they have been met.  

The European Securities and Markets Authority (ESMA) has clarified the use of free-trial periods for research services under MiFID II’s unbundling requirements.

An updated Q&A from the EU watchdog stated that free-trial periods where a firm does not pay for its access to third-party research qualifies as an inducement when it is provided with the provision of an investment service.

However, ESMA confirmed that despite concerns having been raised around Europe about free-trial periods for research, they are acceptable under the inducement requirements in some cases under MiFID II.  

“ESMA is of the view that free trial periods of research services – research that is received so that the firm may evaluate the research provider’s research service before deciding whether or not to enter into a contract or arrangement for the provision of research services for a fee – may qualify as minor non-monetary benefits,” the Q&A said.

To qualify as such, firms must meet several requirements including specific agreed terms of the period prior to entering a contract relating to research, ensuring the trial is limited to no longer than three months, and that it does not begin within 12 months of termination of a prior arrangement for research.

Firms must also have controls in place to ensure clients are not charged for the research they receive under the free trial period. ESMA concluded that investment firms must keep a record of how these terms have been met throughout the trial period.

Asset managers have been forced to pay for research explicitly under MiFID II, rather than through execution missions or a commission sharing agreement (CSA) as part of unbundling requirements.

The rules have proved to be controversial on the buy-side, with many asset managers claiming that unbundling has reduced access and quality of research, despite recognising it does have a positive impact for end investors.  

In June, the UK’s Financial Conduct Authority (FCA) said it would be carrying out a review of the rules around research payments and corporate access over the coming weeks as it looks to gain a better understanding of the effects of the rules.

The FCA first said in April that it had laid out plans to increase the assessment and monitoring of compliance with MiFID II rules around conflicts of interest, including for research unbundling and best execution.