MiFID II- FCA cancels BestEx reporting and rationalises Research Rules

The FCA has issued proposals to partially reverse MiFID II research and best execution requirements. Consultation paper CP 21/9 follows the OJ publication of the EU’s MiFID “Quick Fix”, which went some way to addressing criticism of Research and BestEx rules; the FCA proposals go further, representing a further instance of UK-EU divergence.

Best Execution reporting

The consultation requests feedback on the proposed removal of RTS 27 and 28 reporting obligations. With the exception of reporting solution vendors, feedback is likely to be overwhelmingly supportive. The FCA has already announced that it will not enforce action against trading venues that fail to produce quarterly RTS 27 Best Execution reports during 2021 and the consultation paper makes it clear that the data is both useless and effectively unused. RTS 28 reports, requiring executing firms to publish an annual list of their top five executing venues, lack both specifics and timeliness and are regarded as similarly unhelpful by both the Regulator and the wider market. Although a pragmatic and welcome decision, the UK deletion of Best Execution reporting does represent a divergence from the MiFID II Quick Fix which temporarily suspends the obligations with the option to extend such suspension. While the end result is likely to be the same, the FCA is taking definite and unilateral action in this regard.

Research

SME exemption– the FCA is proposing an exemption from the inducements rules for research on SMEs with a market capitalisation below £200m. The threshold is assessed for the preceding 36 calendar months and the exemption will only apply if the research is provided on a rebundled basis or for free. The rationale for the exemption is that these companies are barely material in terms of creating an inducement or conflict risk and are generally under-researched. The FCA proposal mirrors the EU action, but in this case is less extensive, the Quick Fix exemption applies to SME firms with a market capitalisation of EUR 1bn. or less.

FICC exemption– the FCA proposes an exemption from the inducements rules for third party research that is received by a firm providing investment services or ancillary services to clients, where it is received in connection with an investment strategy primarily relating to FICC instruments. In support of the exemption, the FCA points out that FICC brokers make their money from the bid-ask spread rather than commission, therefore issues of cost opacity are less likely to arise. This evident truth was made very clear to Regulators during MiFID II’s long gestation period, obviously to no avail. The FICC exemption is not covered by the Quick Fix, but it should be noted that its Article 5 requires the Commission to report on research rules amongst other MiFID II grievances by 31 July 2021.

Independent research providers’ exemption– the FCA proposes an exemption for those research providers who are entirely independent i.e. not engaged directly in or part of a group that engages in execution or brokerage services. They would be exempted by being included in the list of minor non-monetary benefits. Independent Research providers only account for a small proportion of the overall market and their independence absolves them from conflict risk. This proposal represents another, if minor, divergence from the MiFID Quick Fix in its current state.

Openly available research exemption- The FCA also propose to include openly available research in  the list of minor non-monetary benefits. “Openly available” means that there are no conditions or restrrictions to access, for example requiring a log-in, sign up, user information submission or submission of user information. Although, this may be addressed in the late EU even slower than the “Quick” July report, this exemption represents another UK divergence, albeit one that should be filed under Obvious.

In summary, the FCA proposals are entirely sensible and, particularly in the case of BestEx reporting, go some way to addressing two of the most egregious MiFID II areas of overreach.  However, it should be noted that, to the extent they extend the severely-limited remit of the Quick Fix, they are another set of UK-EU divergences to add to the growing list. Equivalence looks further away by the week, if not by the day.

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