Things are really heating up for our institutional friends in wholesale, and 2017 would appear to be a pivotal year for them in their preparation for both SMCR and MiFID II. That is if you can still be institutional.
Leaving aside SMCR the issues of which T&C News is covering extensively, there are some weighty issues to tackle as part of MiFID II. One which is causing much constellation across wholesale business, both on the buy and sell side, is Investment Research.
In essence when is research not research? The FCA is suggesting when it is not “useful or relevant” to retail clients, and they are unable to decide whether or not as investors they are getting value for money. Their further explanation is covered in the last MiFID II consultation paper (CP16/43) released on 16th December which follows hard on the heels of the November Asset Management interim report on pricing. Some commonality and themes from both of these documents are hard to ignore and demand in some areas, a root and branch rethink on how we demonstrate transparency in all aspects of fees and charging to customers.
Wholesalers could easily ignore them at their peril
Putting the finer details (of which there are too many to tackle in a short article) aside for a moment, wholesalers need to ask themselves some basic questions, which from, admittedly, limited investigation do not always appear to have been asked;
- Who are we selling research to and how is it paid for? (Sell side)
- Do we know absolutely how we pay for research? (Buy side)
- Have we considered TCF in our thinking? (Buy and sell side). Again not a phrase commonly heard when you are speaking to wholesalers and producers.
CP16/43 is suggesting two further requirements in relation to investment research;
- “Explicit requirement for firms to introduce a physical separation between financial analysts and other persons whose responsibilities or business interests may conflict with the interests of the persons to whom the research is disseminated.” Of course the nature, scale and complexity of the firm will be taken into account if this is not adhered to, however, these firms must demonstrate appropriate alternative information barriers. Of course this will help with their obligations to meet the requirements of the Market Abuse Directive.
- To make clear that the UK centric descriptor which is not differentiated in the MiFID II directive namely ‘non-independent research’ – “is not presented as objective or independent and is accordingly considered a marketing communication.”
The second change again will require some questions to be asked. Who sees our internal research and how do they use it? If it is now to be badged as marketing communications we may need to put it through our Financial Promotions process and that is not routinely happening with internal research currently.
Like most regulation the requirements for investment research can be depicted in a Venn diagram, there are numerous overlaps and touch points with other regulatory demands. Wholesalers could easily ignore them at their peril, but by starting with the basic premise of “is this clear, fair, not misleading and transparent to all customers paying the fees and charges we are demanding” it may be a less arduous start to 2017.