EU regulator waters down dealing commission stance

Investment managers will not be banned from using dealing commission to pay for research under revised Mifid II rules proposed by the EU financial regulator today.

Earlier this year, the European Securities and Markets Authority set out plans to ban the use of dealing commission to pay for privileged access to research analysts, bespoke reports or analytical models, investor field trips, or corporate access and market data services.

While an ESMA paper published today does not stop investment firms paying for research using commission altogether, Investment Management Association chief executive Daniel Godfrey says the current rules will be tightened significantly.

He says: “ESMA has changed its position. Instead of saying most of what is currently bought as research is now banned, because its value is high and so it cannot be considered to be a minor inducement, they are now saying clients can continue to pay for the research investment managers use separately to the annual management charge.

“But they are putting some quite tight requirements around the governance of that spending to ensure conflicts of interest are minimised and to assure it reflects the value clients receive.

“It is quite a big change from today’s requirements. It won’t be a big change for everybody because some firms already operate in this way, but in terms of regulation it is quite a big shift. However, it is not the ban that was originally proposed.”

Mifid II will come into force in January 2017 and will usher in a number of changes to the functioning of secondary markets across a broad range of asset classes. These include the obligation to trade derivatives on trading venues, requirements for algorithmic and high-frequency-trading and new supervisory tools for commodity derivatives.

ESMA chair Steven Maijoor says: “Once fully implemented, MiFID II will have a significant impact on the EU’s securities markets, its users and infrastructure providers. It will bring greater transparency and improve the overall functioning of markets thus strengthening investors’ trust in the financial sector.”