The Financial Conduct Authority (FCA) has allowed research firms to offer trial periods to firms, providing a little more flexibility under the incoming Mifid II rules.
The City watchdog has published its final policy statement on the implementation of Mifid II yesterday, six months before it comes into effect.
While the FCA has confirmed that the research and inducement rules will apply to all firms, including discretionary managers, it has addressed a number of practical issues on the application of the requirements.
This includes adding two new types of ‘acceptable minor non-monetary benefits’ which are in relation to connected research and trial periods.
The regulator will allow limited trial periods for a research service provided that it is for up to three months. The investment firm is not required to give any monetary or non-monetary reward to the provider and a new trial with the same providers within a 12 month period is not accepted.
It noted: ‘An investment firm must also ensure that receiving research for a trial period is consistent with the other conditions for acceptable minor non-monetary benefits and should keep adequate records to allow them to demonstrate that each research trial received is compliant with these conditions.
‘At the end of a trial period, in order to avoid further research from a provider constituting an inducement, a firm would need to either cease receiving it or establish a research agreement and payment terms.’
Meanwhile, the regulator has stated that it accepts the fact ‘connected research’ written by an analyst ‘on an issuer in the specific context of a primary market capital raising event’ should constitute acceptable minor non-monetary benefit.
‘We believe that these targeted easements provide sufficient and appropriate flexibility to support the continued production of SME research in line with prevailing market mechanisms across that market segment,’ it said.
Chris Turnbull, co-founder of Electronic Research Interchange, commented: ‘Confirmation that asset managers can make use of a trial period to evaluate research before committing will ensure there is no cliff-edge drop.
‘The three month trials permissible are not long and, given that separate trials must be at least 12 months apart, do not give the buy-side much time to assess the quality of research they are receiving. Asset managers will need to prioritise certain research relationships and make efficient use of trials to decide on providers that will deliver the most value for their organisation’s requirements.’
30 day rule
The FCA has also made an amendment to how research payment accounts (RPA) should work under the new rules. It has decided that investment firms should make sure that research charges go into an RPA within 30 calendar days from a transaction taking place.
While businesses can choose to have a combination of RPA-based methods and using their own resources to pay for research, the FCA pointed out that they need to make sure it does not result in any potential conflicts of interest
The regulator added that some activities that are inherent to execution services, such as structuring a series of derivatives transactions, working large orders or taking trades on risk, should not be considered a ‘separate benefit received by a firm’. It also clarified that the investment firm can accept transaction reporting by the broker in so far as it doesn’t influence best execution.
The regulator has confirmed that it will remove the partial exemption in taping rules for discretionary investment managers and reiterated that advisers will be allowed to either take notes or record phone calls.
Firms will be required to record only conversations that result in a transaction or are intended to result in a transaction. The FCA has rejected worries that this will mean companies will need to record all of their employees telephone, videoconference, email and other communications.
About the cost of retaining the recordings for five years – which was a concern raised by respondents – the FCA has said it did not receive ‘strong evidence’ to support the claim.
However, there has been one amendment where the FCA has removed financial instruments not linked to trading on a trading venue from the scope of instruments required to tape by non-Mifid firms. This, it said, will make sure that the regime is more proportionate and the correct conversations are captured. Otherwise, the requirements remain the same as set out in its consultation paper last year.