The UK authorities are pushing on in earnest with reforms to the UK’s financial regulatory framework with one of the latest missives involving some ‘quick fixes’ to the markets in financial instruments directive (MiFID) II as proposed by the Financial Conduct Authority (FCA).
Source: Global Risk Regulator
On April 28, the FCA launched a consultation on the treatment of investment research and reporting requirements for share trading reflecting changes the EU wants to make to its version of MiFID II. The FCA said it aims to reduce burdens on investment firms while maintaining UK competitiveness.
Similarly to the EU, the FCA proposes scrapping rules requiring research costs to be unbundled from brokerage fees for listed companies with a market capitalisation of less than £200m and also for fixed income, commodities and currencies. Spending on investment research on smaller listed companies has dropped 20-30%, raising fears that these firms are becoming neglected by the investment community.
Another recommendation intended to boost UK competitiveness is to remove the need for asset managers to produce annual best execution reports. Platforms run by brokers would no longer need to produce reports on trade quality either.
“Just four months in from Brexit and already rules are beginning to change for research houses and providers,” said Daniel Carpenter, head of regulation at software firm Meritsoft. However, he warned that potential divergences between the UK and EU versions of MiFID creates a “mountain of additional complexity” around charging for investment research.
“The consultation paper, which is the first of three, cements the FCA’s desire to bring about change to the areas of MiFID II that are not working as intended or those that simply do not bring value to the UK by supporting its growth and competitiveness,” said Linda Gibson, director, head of regulatory change at Pershing, a financial services outsourcing firm, adding that it nonetheless is another example of fragmented rule-making.
Vuk Magdelinic, CEO at Overbond, a bond trading platform, said the research unbundling rules have negatively impacted coverage of fixed income markets over the last two years. “If they stay in place much longer, there is potential for a more drastic drop off in the conventional type of research coverage,” he warned.
However, he characterized the announcement as a backward step to pre-MiFID II days. “For real progress, greater efforts need to be made to generate more data points to which artificial intelligence can be applied for more sophisticated automated research.”