On 30 November 2021, the FCA published PS21/20 on reforms to UK MiFID’s conduct and organisational requirements, setting out changes to the research rules and, in a move that will no doubt be welcomed by market participants, the removal of the best execution reporting in RTS 27 and RTS 28.
The new inducement rules will operate to:
- Exempt research on small and mid-cap listed or unlisted companies (SMEs) that have a market capitalisation below GBP 200 million from the inducement rules. This means that research on firms below this threshold could be provided by brokers to asset managers on a bundled basis (where asset managers make a single commission payment to brokers covering execution and research) or for free and without constituting an inducement under the rules.
- Exempt third party research on fixed income currencies and commodities (FICC) instruments from the inducement rules allowing it to be provided on a bundled basis and would not constitute an inducement under the rules.
- Exempt research providers from the inducement rules where they do not provide execution services and are not part of a group that includes a firm offering execution services.
- Clarify that openly available written research would not fall within the scope of the inducement rules.
Through these changes, the FCA aims to increase the research coverage of SME issuers and to create a regime that is proportionate to the risks of inducements that arise.
The rules on reporting obligations remove:
- the obligation on execution venues to publish a report on a variety of execution quality metrics to enable market participants to compare execution quality at different venues (known as RTS 27 reports); and
- the obligation on investment firms to produce an annual report setting out the top 5 venues used for executing client orders and a summary of the execution outcomes achieved (known as RTS 28 reports). This obligation currently applies to firms engaged in the provision of portfolio management services, reception and transmission of orders, and execution of client orders.
Through these changes, the FCA seeks to remove reporting requirements where the cost for provision is not commensurate with the benefit from improved quality of execution resulting from the transparency.
The removal of these reporting obligations will no doubt be welcomed across much of the industry. In making these changes, the FCA notes that feedback it has received indicates that there are very few users of those reports and almost all respondents to its consultation on the proposed changes preferring complete removal. That feedback accords with the market response observed across the EU in the lead-up to and following implementation of MiFID II, which indicated that the top five broker reports required by RTS 28 in particular were likely to be of limited use in practice, and could even be damaging to firms’ relationships with their brokers in some circumstances.
It is also worth noting that, at EU level, the MiFID II “Quick Fix” Directive, issued to provide temporary relief in response to the pandemic, postponed RTS 27 reporting obligations until 28 February 2023; the Recitals to the Directive acknowledge that the RTS 27 reports “are rarely read, as is evidenced by the very low numbers of views on the websites of trading venues, systematic internalisers and other execution venues” and “do not enable investors and other users to make any meaningful comparisons on the basis of the information they contain”. However, ESMA’s September 2021 consultation on MiFID II best execution reports proposes to revise the reporting obligations rather than to remove them, in particular by reducing the granularity and volume of data to be reported in the RTS 27 regime. Reporting requirements would instead move to a set of seven indicators on key features of the venues’ execution quality, and refine the RTS 28 reporting requirements for firms that do not themselves execute client orders or decisions to deal, but instead transmit them to third parties for execution.
As of 1 December 2021, UK firms and execution venues are no longer required to prepare RTS 27 and RTS 28 reports.
From 1 March 2022, asset managers and research firms will be able to exercise the options on exempting the following from the inducement rules on research: research on SMEs below a market capitalisation of GBP 200 million, FICC research, research provided by research providers who do not provide execution services and are not part of a group that includes a firm offering execution services and openly available research.