The UK’s financial regulator has proposed several “quick fixes” to rules covering investment research and reporting requirements for share trading to ensure that asset managers are not at a disadvantage to their European competitors now the country has left the EU.
The Financial Conduct Authority suggested the tweaks after EU authorities last year revealed a wide-ranging series of updates to the pan-Europe market rules, known as Mifid II, which came into effect in 2018.
The FCA was one of the main architects of Europe’s Mifid rule book, but it has pledged that a post-Brexit UK will not be a “rule taker” from Brussels — a stance likely to lead to new divergences in financial regulations between Britain and Europe.
“Our proposals aim to reduce burdens on investment firms while having regard to growth and the competitiveness of UK financial services,” the FCA said on Wednesday.
Current Mifid rules require asset managers to split the cost of buying research from any trading costs incurred for buying and selling securities. This was designed to prevent investment banks and brokers from offering research to portfolio managers an inducement to direct trading orders to them.
Under the new proposals, research on small- and medium-sized companies with a market value of less than £200m — as well as income, currencies and commodities — will no longer be subject to the “inducement” rules.
Research spending by asset managers dropped by between 20 and 30 per cent following the introduction of the rule, triggering concerns that smaller companies and innovative new businesses would find it more difficult to raise money to fund growth from institutional investors.
Research from independent providers will also be exempted from the inducement rules.
“This will generate more of a level playing field and give asset managers more choice, value and quality, benefiting the entire market,” said Steve Kelly, special adviser at Euro IRP, the trade body for independent research providers.
Almost 80 per cent of publicly traded companies with a market value of £250m or less have either no research coverage or are covered by only one analyst. The lack of information leads to less efficient pricing in their securities compared to larger listed rivals, according to the FCA.
The regulator has also proposed that asset managers should be allowed to pool together money to fund research on smaller companies.
Joshua Maxey, managing director of Third Bridge, an independent research provider, said Mifid II had created unintended consequences by cutting off access to independent research and limiting coverage of small- and medium-sized companies.
“This hurt the investment research ecosystem and stifled competition as fund managers became increasingly wary about sourcing alternative research,” he said.
The FCA has also suggested that investment managers no longer need to produce annual “best execution” reports detailing efforts to secure the best pricing on all transactions for clients.
In addition, platforms run by brokers should not be obliged to publish reports on trading execution quality metrics, intended to help market participants evaluate different service providers.
“No tears will be shed for the best execution reports. They were extremely detailed, logistically complicated and they didn’t add much value,” said Nick Bayley, managing director in Duff & Phelps’ compliance and regulatory consulting practice and a former FCA regulator.