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FCA Publishes Findings From Review of MiFID II Research Unbundling Rules

On September 19, the UK Financial Conduct Authority (FCA) published its findings from its review of unbundling of third-party research under the revised Markets in Financial Instruments Directive (MiFID II).

MiFID II, and the FCA’s related implementing rules, requires asset managers to pay for third-party research explicitly and brokers to price and provide services separately. In order to assess the implementation of such rules, the FCA undertook a review between July 2018 and March 2019 of 40 buy-side firms and conducted 10 visits to buy-side and sell-side firms.

The FCA identified changes in firm behavior in response to the MiFID II reforms, which suggests that the market has moved towards the intended outcomes of accountability and price transparency. However, the FCA also noted that research valuation and pricing are still evolving.

Overall, the FCA found that:

  • most buy-side firms have chosen to absorb research costs themselves, resulting in savings for investors;

  • most buy-side firms also can still access the research they need with no material reduction in research coverage, including for listed small and medium enterprises;

  • asset managers’ research valuation models have different levels of sophistication, particularly in evaluating the quality of research. The FCA stated that it expects firms to refine their models to ensure they are acting in the best interests of their clients;

  • there is a wide range of sell-side research pricing levels, which the FCA attributes to an ongoing process of price discovery. It will monitor this for potential competition concerns and will act if necessary; and

  • some firms were uncertain about the application of the new rules to various activities such as attending trade association events, marketing research services or making contributions to consensus forecasts. The FCA has provided clarification of its expectations on these areas in its report.

The FCA intends to undertake further work in 2020/21 to assess the impact of the new rules, given that firms are still developing their arrangements and a market for separately priced research is still emerging.

The findings are available here.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume IX, Number 270


About this Author

John Ahern, Financial Attorney, London, Katten Law Firm

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

+44 (0) 20 7770 5253
Carolyn H. Jackson, International Attorney, Katten Muchin law firm

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

+44 0 20 7776 7625
Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

+44 0 20 7776 7629
Neil Robson, private equity fund managers counselor, Katten Law Firm, London

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...