On 30 November 2021, the Financial Conduct Authority (FCA) published Policy Statement 21/20 ‘Changes to UK MiFID’s conduct and organisational requirements’ (PS21/20).
In PS21/20 the FCA sets out its final policy position and rules on changes to the research rules and the removal of best execution reporting in Regulatory Technical Standards (RTS) 27 and 28. The changes being made by the FCA are intended to ensure rules for research and best execution under the UK Markets in Financial Instruments Directive (UK MiFID) are more proportionate to the risks arising, removing unnecessary regulation.
The new inducement rules relating to research:
- Exempt research on small and mid-cap listed or unlisted companies (SMEs) who have a market capitalisation below £200m from the inducement rules. This means that research on firms below this threshold could be provided by brokers to asset managers on a bundled basis (where asset managers make a single commission payment to brokers covering execution and research) or for free and would not constitute an inducement under the rules.
- Exempt third party research on fixed income currencies and commodities (FICC) instruments from the inducement rules allowing it to be provided on a bundled basis and would not constitute an inducement under the rules.
- Exempt research providers from the inducement rules who do not provide execution services and are not part of a group that includes a firm offering execution services.
- Clarify that openly available written research would not fall within the scope of the inducement rules.
The rules on reporting obligations remove:
- The obligation on execution venues to publish a report on a variety of execution quality metrics to enable market participants to compare execution quality at different venues (known as RTS 27 reports).
- The obligation on investment firms who execute orders to produce an annual report setting out the top 5 venues used for executing client orders and a summary of the execution outcomes achieved (known as RTS 28 reports)
The aim of the changes is to improve the availability of research on SME firms by providing an exemption to the inducement rules that prohibit the bundling of research and execution fees. Changes being made to best execution are intended to relieve trading venues and brokers from preparing and publishing best execution reports that do not benefit users.
As regards timing:
- From 1 December 2021, firms will no longer be required to prepare RTS 27 and RTS 28 reports in the UK. These are the obligations on execution venues and firms to make public information on execution quality and order routing.
- From 1 March 2022, asset managers and research firms will be able to exercise the options on exempting the following from the FCA inducement rules on research: research on SMEs below a market capitalisation of £200m, FICC research, research provided by research providers who do not provide execution services and are not part of a group that includes a firm offering execution services and openly available research.