MiFID II scale back by FCA presents both risks and opportunities

Scrapping of MiFID II research requirements for small caps and best ex by FCA could pose risk to UK businesses also operating in the EU, says RegTech expert.

Industry reaction to the UK regulator scrapping payments for research on small caps and best ex reporting in MiFID II scale back, has been mixed, with some saying it will help drive out hidden costs, while others expressed caution about the UK’s divergence away from RTS 27 and 28.

In its first major deviation from EU regulations following Brexit, in early December, the UK Financial Conduct Authority (FCA) removed the requirement under MiFID II to submit RTS 27 and RTS 28 reports and exempted companies with a market cap of less than £200m from research payment rules.

The FCA sought to remove unnecessary regulation and make MiFID II requirements “less complex”. Industry reaction to the announcement, however, has been mixed.

Joshua Maxey, founder & CMO at Third Bridge said the changes would allow more asset managers to tap into an independent research market that has transformed over the past five years. “It will also help drive out some of the hidden costs that still inhabit the system where banks use research as a loss-leader,” he added.

However, Maxey said there is still some way to go before we have the kind of research market investors need and want.

“By exempting non-execution research providers from inducement rules, it is now crystal clear that asset managers can, and probably should, trial more independent and unbiased research,” Maxey continued. “We have seen in recent surveys that primary research firms are starting to take a more meaningful share of the research wallet and expect this trend to continue.

Maxey said the independent research market had come a long way, with many more primary research firms in the market, and a greater diversity of products than ever before. “At the same time, asset managers already familiar with independent research aren’t just tying themselves to one provider, many will have a basket of research companies, some for niches, some for geographical reach, and others for speed and consistency.”

Matt Smith, CEO of SteelEye, a RegTech firm which aims to simplify regulatory reporting via its cloud-based platform, says the FCA’s decision is the first real clear sign of UK deregulation and divergence away from the European Securities Market Authority (ESMA).

While Smith is in favour of the scrapping of research payments, which he sees as a constraint that is not in place in other markets – namely the US – he is cautious about the divergence away from RTS 27 and 28. This is due to the risk it poses to UK businesses also operating in the EU.

Smith believes that there are two potential drivers for the FCA’s decision: “Either the FCA want to deregulate to attract businesses to the UK,” he explains, “or, they fundamentally don’t believe in these components of the regulation.”

“Either way, both potential reasons for this change will cost firms operating in both jurisdictions time and money, with potential complications ahead if the EU no longer see regulatory equivalence with the UK,” he adds.

Smith believes divergence from ESMA will start to influence where people want to operate and transact out of the UK.