15 April 2016 – Last week the European Commission published the first Delegated Directive under MiFID II, dealing amongst others with the use of dealing commissions to pay for research. At the moment, research provided by brokers to investment firms is not paid for directly. Such research is paid for through transaction fees. Such research will now be considered an inducement.
Under MiFIDII, firms are not allowed to accept and retain such inducements. This means investment firms can only accept research if they pay for it with their own money or through a separate research payment account funded in advance and unlinked to the volumes of trade executed.
European Investors supports the unbundling of research and broking costs. Bundling could encourage buyside firms to over-trade in order to gain a large share of research budget rather than consider value. Moreover, we expect that if firms have to pay for research directly, they will start to look more at quality and value for money. We are therefore glad to see the Commission has decided to largely leave the advice of ESMA, as provided in December 2014, intact.
The industry did get some concessions though. “Non-substantive material or services” will be considered a “minor non-monetary benefit”. This means brokers will be able to continue to offer market commentary to clients without charging a separate fee. Research containing “analysis and original insights” the conclusions of which “could be used to inform an investment strategy”, on the other hand, will be considered an inducement.
The European Parliament and Council each have several months to object to the proposals of the Commission. If the legislators do not object, the Delegated Directive will enter into force on the 3 January 2018 together with the Level 1-text and all other Level 2 measures. Apart from research unbundling, the Delegated Directive also deals with the safeguarding of financial instruments and funds belonging to clients, product governance obligations and provisions or reception of fees, commissions or any monetary or non-monetary benefits other than research.