IMA Objects to European Research Proposals

Terry Flanagan

The Investment Management Association, which represents the UK fund-management industry, has rejected the proposal from European regulators which imposes restrictions on using dealing commissions to pay for research.

The revised Markets in Financial Instruments Directive, which covers trading in the European Union, said that research cannot be distributed for free and costs must be unbundled, or separately identified, unless certain conditions are met from January 2017.

Esma has proposed that firms can only provide free research to investor clients if there really is no cost, if the research is widely distributed and there is no access to analysts.

The IMA has responded European Securities and Markets Authority’s consultation on MiFID II and said it does not support Esma’s proposals.

Daniel Godfrey, chief executive of IMA, said in a statement: “Research associated with the use of dealing commissions is not an inducement. Rather, it raises conflicts of interest, which need to be managed. Further, Esma’s proposals would create a muddled regime with never-ending debate about what was allowed and what was not.”

Godfrey added that unilateral change in Europe or the UK would create regulatory arbitrage and put the UK fund management industry at a competitive disadvantage.

The IMA said it intends to host a conference for global regulators, investment managers and sell-side providers of investment research to evaluate current and alternative models of paying for research, including those where dealing commissions are no longer used.

“The evaluation process must consider the impact that any new model might have on investors and equity market users, including in particular the potential for reduced research coverage, poorer price formation, reduced liquidity in small cap stocks and raised barriers to entry for new entrants to the investment management industry,” Godfrey added.

Law firm Ashhurst said in its review of MiFID II that the research proposals are a significant change and runs contrary to proposals from the Financial Conduct Authority in the UK, which were announced in May.

When the FCA clarified its rules on dealing commission it said buyside firms should pay for services directly related to executing a trade or substantive research out of dealing commission.

Martin Wheatley, chief executive of the FCA said at a conference on dealing commission: “There is a strong evidence to suggest the current model of using dealing commission to pay for research reduces transparency and creates a link between research spend and trading volume, without a clear assessment of the value this offers to investors.”

Last month the FCA published a review of how firms use dealing commission, which it estimated at around around £3bn a year.

The FCA said: “Based on these findings, the FCA has announced its support for proposed European reforms to further separate research from dealing commission, to encourage greater competition and more transparency over the price of research.”

The review found that only two firms out of 17 investment managers and 13 brokers met the regulator’s expectations. The UK regulator said it is not currently consulting on detailed policy proposals, given the potential Esma reforms.

The FCA said: “However, this discussion paper and the responses we receive will help inform whether and, if so, how we make further changes to our existing use of dealing commission regime as we consider the implementation of MiFID II, which will apply by early 2017.”

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