The FCA has proposed to ban independent advisers and portfolio managers from accepting payments from third party firms on investment research.
According to the third FCA Mifid II consultation paper, published today, only certain research products such as commentary on market moves or company results may be exempt as “minor” and “non-monetary.”
Mifid II will be implemented in January 2018.
Meanwhile, the Mifid overhaul is set to cost firms $2.1bn (£1.6bn) for a technology update, according to an estimate by IHS Markit and Expand, a consultancy owned by the Boston Consulting Group.
The estimate includes the top 40 investment banks and top 400 asset-managers.
The FCA’s suggested rules, which apply to equities as well as fixed income and other non-equity instruments, say that for a non-monetary benefit to qualify as “minor” requires “a consideration of the substance of its content” not how it’s labeled or who produces it.
The FCA says: “It is for the receiving firm to make their own assessment, and if material does appear to be substantive, value-added research, and so is not minor in nature and scale, a firm will need to either pay for it under the new research requirements or not accept it.”
The FCA also want research costs to be “fixed, predictable cost” with no links to execution costs but be a “core management cost” or to be fully transparent to investors to eliminate any potential conflict of interest.
Ashurst regulatory lawyer Tim Cant says the new rule is “a significant” and, “unwelcome change” for many City firms.
He says: “The FCA has today signalled the end of CSA arrangements as we know them. Managers will now need to establish a single research payment account, and take control over, or outsource its operation.
“This will require significant changes to processes and legal arrangements, and puts the FCA at loggerheads with other European regulators, such as the AMF, who are taking a more flexible approach.”