Despite less than a year until the MiFID II deadline, asset management firms are failing to meet regulator’s expectations for dealing commission requirements and unbundling.
The Financial Conduct Authority (FCA) visited several investment management firms and found the majority are inadequately assessing the costs and justification for research as required under MiFID II.
“We identified poor practices at the majority of firms we visited and several could not demonstrate meaningful improvements in terms of how they spend their customers’ money through their dealing commission arrangements,” the FCA said.
Some firms visited by the regulator have opted to cover the cost of externally produced from their own resources rather than from dealing commissions.
The FCA said this method mitigates conflicts of interest, provides greater transparency and allows firms to demonstrate best execution.
Vicky Sanders, co-CEO at RSRCHXchange, explained fund managers should think in cash terms not percentage points when it comes to research spend.
“Corporate access should not be paid for with client money, only "substantive" research can be paid for and systems and record keeping are essential to ensure that client money is spent fairly and transparently - all cornerstones of MiFID II,” she said.
The FCA added it identified a range of practices, with some showing little thought or consideration behind how research budgets are set and managed.
Neil Scarth, principal at Frost Consulting, said under MiFID II, client budgets will have to “relate to the actual investment product the asset owner is invested in… Managers must systematically incorporate “research intensity” in the budget calculation.”
The regulator added implementing budgets should introduce discipline around how much substantive external research a firm requires and how much of their clients’ money they spend on it.
A recent survey carried out by Liquidnet’s head of market structure and strategy for EMEA, Rebecca Healey, found unbundling was the biggest concern for 42% of fixed income traders, followed by 35% who listed pre-and post-trade transparency.
“The challenge for buy-side participants is once firms unbundled research payments, the focus will then be on their delivery of best execution. The FCA noted in their statement that some firms have been more proactive in how they are meeting their best execution obligations which highlights those who still have work to do,” Healey explained.
The FCA added where it identifies breaches of the rules it will consider appropriate action including more detailed investigations into specific firms, individuals or practices.
Sanders concluded: “With the regulators determining that the industry has "failed", they have responded by introducing new, more stringent regulation.”