Asset managers are facing a significant disclosure regime relating to research payments, as detailed in delegated acts published by the European Commission today.
The acts, which cover the regulation of inducements received by investment firms, will require asset managers to disclose a wide variety of information to their clients regarding costs and charges relating to research acquired from third parties.
It states that research will not be regarded as an inducement in two circumstances; either when it is paid for directly by the investment firm from its own resources, or through a separate research payment account (RPA).
Using an RPA will come with a range of additional conditions for firms. RPAs must be funded by a specific research charge to clients, firms using them must set and regularly assess their research budget, and they must regularly assess the quality of the research purchased using a robust quality criteria.
Furthermore, those firms opting to use RPAs to pay for research will need to provide their clients with information about their research budget and estimated research charges per client. They will also need to provide annual information on the total costs incurred for third party research.
Clients will be entitled to request additional information on research payments as well. The act says: “Member States shall ensure that the investment firm shall also be required, upon request by their clients or by competent authorities, to provide a summary of the providers paid from this account, the total amount they were paid over a defined period, the benefits and services received by the investment firm, and how the total amount spent from the account compares to the budget set by the firm for that period, noting any rebate or carry-over if residual funds remain in the account.”
Firms will not be allowed to charge more in total for research than their research budget, and any increase in the research budget can only take place once clear information has been provided to clients about intended increases.
Pedro Fernandes, CEO of research payment platform provider ResearchPool, said the onerous rules for RPAs could make them an unattractive option for asset managers to use.
“The use of RPAs is a less disruptive change to market practices and established arrangements than the implementation of a specific fee to fund research or the use of a firm’s own funds. But market participants may opt for the latter solution, given the complexity of operating RPAs. Some Players in Sweden, which unbundled last year, have taken that direction.”
The act also outlined rules for brokers, stating that research and execution services must the separately identified.
“The provision of each other benefit or…shall be subject to a separately identifiable charge”, the paper said, indicating that brokers will need to provide some form of pricing structure. Some buy-side firms had feared the sell-side would avoid offering prices, instead leaving it to their buy-side clients to decide what the research they receive is worth.
While the text provides no clear indication of how CSAs will fit into the new regime, co-founder of RSRCHXchange, Vicky Sanders, believes it will be viable.
She said: “The research payment account should only be funded by a specific research charge to the client which should only be based on a research budget set by the investment firm and not linked to the volume and/or value of transactions executed on behalf of clients.
“Any operational arrangements for the collection of the client’s research charge should fully comply with those conditions.”
Sanders concluded: “Firms using RPAs will need to provide transparent reporting at the end of any period. In order to contain the risk of ballooning admin costs, firms will adapt not at the reporting stage but at the point of consumption.
“It's important that firms position themselves with technology and collect their own data. There are solutions already being used which automate the collection of rich data and simplify assessment and reporting. Firms paying out of pocket will need to understand their research spend in a similar way, not for the regulator but for their own stakeholders.“
The TRADE will be hosting a series of ‘pop-up’ events throughout Europe designed for buy-side trading firms and their partners to discuss the strategies, systems and working practices necessary to comply with MiFID II.
Click here for more information.