The Financial Conduct Authority (FCA) has been reviewing the effects of the Markets in Financial Instruments Directive II (“MiFID II”) on the behaviour of market participants, especially as it relates to research spending and corporate access. As a result, compliance officers who worked to implement controls designed to address MiFID II requirements may need to take additional action.
MiFID II includes rules designed to ensure that any benefits financial firms and their personnel receive are reasonable and proportionate. In addition, any such benefits cannot induce or influence the firm or its employees in any way that could be detrimental to the firm’s clients.
The FCA has indicated it has concerns that new, lower charges for research, and changes to the way corporate access is used may actually amount to improper inducements by sell-side firms. This is, ironically, one of the very issues MiFID II was designed to address. At the same time, growing direct control over corporate access by buy-side firms is creating an additional need for their own controls over those activities.
A Dramatic Decrease in Research Charges Post-MiFID II
Six months after the implementation of MiFID II, it is already clear that the directive has had a dramatic impact on the way research is managed, monitored and controlled in Europe, and on the research charges asset managers must pay for sell-side analysts’ research.
Pre-MiFID II, six and seven-figure sums were common for research payments through trading commissions. According to the Financial Times, the typical full-access charge for research by a large, sell-side firm is now between $10,000 and $30,000.
The FCA has announced its intention to review this area in greater detail, to ascertain whether pricing for research in some cases now falls into the category of an inducement.
Increasing Direct Control over Corporate Access
The FCA is also anxious to see how both buy-side and sell-side firms handle corporate access, for the same reason.
Buy-side firms place great importance and rely on corporate access, and growing numbers of large buy-side firms are taking more direct control over corporate access. Under MiFID, sell-side firms must charge separately and transparently for such access.
This, in turn, is leading to potential information access concerns and conflicts of interest risk issues within buy-side firms that are far more complex than what they have had in the past.
Financial Services Firms Need Improved Monitoring and Controls
To address and mitigate risk, firms need the ability to better monitor and control corporate access. Firms will need to track employees’ involvement in corporate access events similarly to the way they create restricted list groups to manage inside information.
Because of heightened regulatory scrutiny, it is also anticipated that firms will also increasingly want the ability to connect gifts and entertainment activity and personal account dealing activity with research relationships and with corporate access events. Firms that track each of these requirements independently may lack the tools needed to identify potential patterns and conflicts, increasing the risk of violations.
ComplySci Can Help Firms Manage Compliance and Avoid Illegal Inducements
Does your firm have the tools and resources needed to verify and document compliance with both the letter and the spirit of MiFID II? The ComplySci® Platform can deliver overall monitoring and can help firms track all aspects of information access, helping better prevent and detect inducements or other problematic activity.
Firms relying on ComplySci can easily track corporate access events and participation at the individual employee level. In addition, firms using ComplySci can also benefit from using a system that can link subsequent events, such as gifts and entertainment or personal account dealing in a company’s stock after attending a corporate event.
While firms are not required to track this information today, it is anticipated that the FCA will require this information in the future. Implementing and becoming comfortable with these capabilities now can help ensure your firm is prepared and ready to demonstrate its commitment to avoiding illegal inducements and complying with all aspects of MiFID II.