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  • Lack of clarity, coupled with minimal buyside engagement with brokers, has hindered investment firms’ understanding of the new rules 

London, 28 June 2022: The Financial Conduct Authority’s (FCA) changes to MiFID II research rules have left investors  unclear as to how they implement them practically, according to the European Leveraged Finance Association (ELFA).  

In its Insights Series report published today, The FCA’s Disapplication of MiFID II Research Rules: Practical Considerations,  ELFA summarises the key changes to the rules, explores market observations and provides advice on how investment firms  can respond.  

The FCA’s new MiFID II research rules took effect in March 2022, with the primary intent of increasing the availability of  research on small and medium enterprises. With this aim, the FCA confirmed certain exemptions to the MiFID II rules  concerning explicit investor payment to brokerages for research and corporate access, including on SMEs with a market  capitalisation of less than £200 million and third-party research on Fixed Income, Currency and Commodities (FICC). While  such moves are generally welcome, differences have resulted in dual operating models in which firms must consider what  fixed income research is exempt and what they must still pay for.  

ELFA has observed that this lack of clarity, coupled with limited buyside engagement with brokers, has hindered investment  firms’ understanding of the new rules. The trade association also highlights that multijurisdictional businesses may find it  difficult to discern if they are in compliance with Europe’s implementation of MiFID II, which may differ from the FCA’s rules. 

ELFA provides practical considerations for investment firms in response to these changes. 

  • ELFA recommends that firms discuss with their research providers how much FICC research would be considered ‘free’  and a Minor Non-Monetary Benefit (MNMB). Few firms will wish to implement dual operating models for a limited cost  saving as doing so would entail extra resources, and they would not be breaking any rules if they maintained the status  quo.  
  • To date, some brokers have altered their financial models and fees, while others have not. ELFA recommends that firms  determine their brokers’ respective approaches and negotiate terms. Before changing research agreements, Individually  Managed Accounts (IMAs) with UK entities must consider any changes that they may need to make. 
  • Consideration of the Senior Managers and the Certification Regime (SMCR) is important. It is prudent for firms to  identify the senior manager in charge of investment research and ensure they have received the necessary Management  Information, and to identify the individual who will make future decisions regarding FICC research. This should be  documented to demonstrate appropriate governance and reasonable steps.  

Sabrina Fox, Chief Executive Officer, European Leveraged Finance Association, said: “Many investment firms are struggling  to understand the practical implications and related changes that will result from the FCA’s disapplication of the MiFID  II research rules. Firms must be vigilant in examining the practical aspects of the rule changes to ensure that they are in  compliance, but also to realise the most benefits where possible. With these changes being relatively new, the landscape may  continue to adapt, and firms must be aware of these practical changes in order to manage their relationships with brokers  effectively. We will continue to monitor the impact on investment firms to help our members identify and navigate any further  implications.”