FCA ‘strongly supports’ MiFID II inducements and advice framework

The UK Financial Conduct Authority (FCA) has released a response to a discussion paper (DP14/3) on the use of dealing commissions in which the regulator strongly supports the European Securities and Markets Authority’s (Esma) final advice on inducements and advice to the European Commission (EC) on the Markets in Financial Instruments Directive II (Mifid II), which was published in December 2014.

The UK watchdog’s feedback statement on dealing commissions fully backs Esma’s recommendations around the separation of portfolio managers’ payments for research into ring-fenced accounts and FCA unveiled plans to implement its own rules alongside Mifid II.

According to the regulator, Esma’s proposals will better align investment managers’ incentives to control costs and make them transparent with their customers over charges for external research, as well as remove the inducement and conflicts of interest created by bundling research into execution arrangements with brokers.

“It will lead to pricing for research by brokers and other providers, encouraging a focus on quality and value for money in this market that will result in more effective competition in the interests of consumers,” it said.

The FCA said in its response that Esma’s advice is not limited by types of Mifid financial instruments and so the restriction on inducements would relate to any third-party research received in the course of providing portfolio management or independent investment advice under Mifid.

“The advice and options for how research can be provided in such a way that it is not an inducement would therefore equally apply to fixed income research,” it said. “In fixed income, costs of research, as well as some other discrete costs, are usually embedded within the negotiable bid/offer spreads quoted by brokers.”

In the new regime, stated the FCA, a manager would have the option either to pay directly for research, or use the research charge and payment account to do so, which can be applied to clients with fixed income portfolios in the same way as for equities.

“If research is currently a material part of a broker’s costs we would expect a narrowing of spreads as a result of the decoupling of research from trading spreads,” said the FCA.

The FCA believes that applying Esma’s approach to fixed income markets will bring transparency in an area that is currently more opaque than equity markets since research is entirely embedded in implicit transaction costs.

“It will open up the market for providing research on the credit markets to firms other than brokers in the bond markets,” it said. “An independent research provider wishing to supply research on the credit markets currently faces a significant competitive disadvantage compared with brokers, as there is no mechanism such as CSAs to allow a third-party research provider to be paid from transaction costs and no market precedent for ‘hard dollar’ payments in this area.”

The FCA also said that it will implement further changes to the UK domestic inducements regime and use of dealing commission rules in line with the final reforms under Mifid II.

“Depending on the form and content of the final legislation, we may also need to consider our approach to areas such as the treatment of Ucits and AIFM investment management activities, and whether it is possible and desirable to consider further detail to clarify our approach to implementing new requirements,” it said.

Click here to read the FCA feedback statement on DP14/3 – Discussion on the use of dealing commission regime.

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FCA ‘strongly supports’ MiFID II inducements and advice framework