MiFID II Delegated Acts: Confusion surrounds new rules

Questions raised over viability of CSAs and potential loopholes on non-monetary minor benefits.

The delegated acts for MiFID II released this week reveal an unexpected increased administrative burden for firms, and has left industry participants scratching their heads with confusion.

The acts expose the level of detailed reporting required, and in light of this, industry experts agree firms may opt out of the use of research payment accounts (RPAs).

The European Commission’s rules on RPAs states firms will have to report on providers paid from the account, the total amount they were paid and over which period, the services received and the amount spent from the research budget.

Juan Pablo Urrutia, general counsel EMEA at agency broker ITG, told The Trade that following the release of the delegated acts, commission sharing agreements (CSAs) simply will not be allowed in their current form under Mifid II.

He found several holes in the newly released documents, which leave firms with more questions than answers.

“The key words in CSA are ‘commission’ and ‘sharing’, you agree with your executing broker a percentage of commission fee and that some part of that fee will then be paid to a third party for research. But the act clearly states that research budgets cannot be linked to the volume or value of trades, meaning it would be impossible to use a CSA,” he explained.

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.”

Pedro Fernandes, CEO of research payment platform provider ResearchPool, echoed Urrutia’s thoughts and told The Trade the increased administrative requirements of RPAs may see firms opting for specific fee funded research.

He said: “Some players in Sweden, which unbundled last year, have taken that direction.”

Neil Frost, principal at regulatory consultancy firm, Frost Consulting, said asset managers will need “the ability to construct monetary at a level of granularity that allows fair allocation of research costs between clients – possibly at the strategy or fund level, rather than the firm level.”

RSRCHXchange co-founder, Vicky Sanders, told The Trade firms need to align their research strategy with new technology to help with the increased reporting burden.

She said:  “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.”

ITG’s Urrutia thinks that even larger firms may have to carefully consider whether to use RPAs, due to the oversight requirements outlined.

Article 13 paragraph 6 of the act, outlines governance procedures and states the need for senior management oversight, with no clarification on who can be considered senior management.

Urrutia said if senior management is C-suit level only, it’s highly unlikely those personnel will be able to look into audit trail information of research payments, particularly in larger firms, making the use of RPAs difficult.

He also said he was concerned about some aspects of Article 12, particularly paragraph 3, which says “information or documentation relating to a financial instrument or an investment service, is generic in nature or personalised to reflect the circumstances of an individual client” is considered a non-monetary minor benefit.

“This sounds an awful lot like research to me and could be used to circumvent the rules,” Urrutia said, “there is a similar provision for seminars and training events, which sounds a bit like corporate access.”