The FCA recently published its third consultation paper on MiFID II, and despite the Brexit vote casting a large shadow over key industry developments in recent months, the regulator has confirmed that firms must continue with implementation plans for legislation that is still to come into effect, of which MiFID II is one such example.
The directive is set to clamp down on trading commission bundling that often results in investors’ research spend being misappropriated. The impending rules now require brokers to provide transparent pricing from the outset, both for the execution of trades, and any research they commission to inform their decision about the trades.
This led many to believe that Commission Sharing Agreements (CSAs), a hybrid account structure where trading commissions are bundled with research spend, would cease to exist. Indeed, a recent report in the Financial Times found that just 15 per cent of fund managers believed they would continue to use CSAs based on the new rules.
At the time of the MiFID II delay earlier in the year, we felt the existing established CSA process would continue, with some modifications to ensure it satisfies the new Research Payment Account (RPA) requirements, and the regulators have now confirmed this is the route being taken. As such, the industry should soon expect to see widespread pre-payment for research (in line with RPA requirements), as opposed to the pay-as-you-go system prevalent in CSAs. More importantly, it satisfies the regulators’ push for transparency, with a straightforward process where costs are made clear to the client.
Whether the UK plans to launch its own Mifid-based framework in the event of a ‘hard Brexit’ remains to be seen. Nevertheless, UK-based fund managers looking to continue marketing funds across the European Economic Area will need to effectively meet these best practice requirements to have a salient business, and we have seen particular examples of large mutual funds, with UK business units, taking a tough stance on how research is valued.
CSAs will continue to be popular around the globe, and this new guidance from the FCA has delivered further certainty of this. If the fund industry in the UK can evolve them to incorporate RPA as a guiding model, it will allow fund managers to continue to use commission to pay for research, with greater transparency that investors can better understand. If we find this answer, the UK will lay a trail that others are sure to follow.
|Commission Sharing Agreements||Research Payment Accounts|
|Pay as you go||Pre-payment|
|Percentage x trading volume||Pre-defined budget|
Joshua Maxey is managing director of Third Bridge.