FCA details review of unbundling under MiFID II

The FCA will contact asset managers, investment banks and brokers to evaluate the effects of unbundling under MiFID II.

The UK’s financial watchdog is to begin a review of MiFID II’s recently enforced rules around research payments and corporate access in asset management over the next few weeks.

The Financial Conduct Authority (FCA) raised concerns that there have been misinterpretations of the rules and their implementation at its asset management conference last week, according to the Financial Times, having been first announced the review in its Business Plan published in April.

Asset managers, investment banks, specialist brokers and independent research providers will be contacted by the FCA within the next few weeks for details around research pricing models, as the regulator looks to gain an understanding of the effects of the rules.

Unbundling of research payments under MiFID II has been a key concern for asset managers who can no longer accept research paid for through execution commissions.  

In April, the FCA 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.

The watchdog said at the time that its focus will be on monitoring compliance with requirements to address conflicts of interest in producing research, and warned that a lack of clarity by market participants about the capacity they are acting in could cause harm to markets.

“The FCA flagged in April that research unbundling would be a focus for their supervisory work this year so there are few who should be surprised that they are starting to formally ask questions,” Vicky Sanders, co-founder of RSRCHXchange commented. “MiFID II is having a profound impact on the research market but it’s still early days.”

A recent survey carried out by RSRCHXchange found that the buy-side is generally negative about the effects of the rules, with many asset management respondents stating that access to research has declined and prices are not sustainable under the regime.

“Given the scale of change introduced by unbundling, I would imagine that the FCA’s work won’t just be a one-off but an ongoing, iterative process,” Sanders concluded.

Similarly, head of regulation at asset management consultancy Alpha FMC Andrew Glessing, explained that dealing with corporate access and investment research conflicts has been high on the FCA’s agenda for a number of years.

“Following the MiFID II ‘go-live’ in January, the regulator will want to see two things in particular,” Glessing said.

“Firstly, in a changing investment research market, is the new model is delivering the inducement- free outcomes it seeks and secondly, can firms can demonstrate that they have embedded the right governance and controls needed, whether as providers or buy-side consumers of research and corporate access? Time will tell.”