FCA proposes reversal of MiFID II research unbundling rules

The proposal is set to give UK buyside firms, such as asset managers, greater flexibility on how they can purchase investment research. This move shows a change of stance by the regulator on the EU’s “unbundling” rules, which it supported initially prior to Brexit.  

Under MiFID II, asset managers must pay separately for research and trade execution services. Investment research can be paid for by asset managers in one of two ways - by the firm itself out of its own resources; or from a dedicated research payment account (RPA). The so-called ‘research unbundling’ rules came into effect on 3 January 2018. Following the FCA’s initial review in 2019, the regulator said that the rules had improved asset managers’ accountability over costs, saving millions for investors.

In a recent consultation paper, the FCA stated that the current options available to UK asset managers are “either operationally complex or may favour larger firms, impacting competition”. It was also concerned that the current regime could impede UK asset managers’ ability to purchase investment research produced outside the UK.

Asset management expert Mark Shaw of Pinsent Masons said the FCA’s proposal to reverse the rules is a recognition of elements that did not ultimately benefit consumers or the market, and indicates a willingness to make incremental improvements.

“While MiFID II had noble objectives – including to increase transparency, better protect investors and reinforce confidence – there are certain areas where it overreached and caused adverse consequences,” he said. “The research unbundling rules were one of these areas, which led to there being less coverage of smaller and mid-sized companies.”

However, the effect of the reversal would take a while to kick in. He added: “The problem with this reversal is that most brokerages and banks disbanded their research departments after the research unbundling rules under MiFID II came in, so it’s unlikely that we’ll see any immediate benefit – although this might be something that could gradually return over time.”

The EU has also recognised this issue. While the benefit of cost transparency has been recognised, the MiFID II rules have adversely impacted independent research. Shaw pointed out that the FCA rule change is mirroring the changes that have also been proposed, albeit not enacted, within the EU to enhance visibility and access to capital for small and medium-sized listed companies.

“Since Brexit, there is always a question of regulatory divergence. Here, the FCA’s approach is similar to that proposed by the European Commission at the end of 2022 for a similar amendment to MiFID II. The EU process is currently with the European Council and, being a Directive, would still need two years to be enacted into the laws of member states, once published. So the UK will at least be able to get the jump on the EU in terms of reinvigorating its equities research,” said Shaw.

The FCA’s consultation on the proposed reversal of the ’unbundling’ rules will close on 5 June and the FCA aims to publish any updates to the rules shortly after.