The UK financial regulator has proposed several ‘quick fixes’ to rules covering investment research and reporting requirements for stock trading to ensure that asset managers are not at a disadvantage compared to their European competitors now that the country has left the EU.
The Financial Conduct Authority suggested the adjustments after EU authorities last year revealed a broad set of updates to pan-European market rules, known as Mifid II, which entered into force. in 2018.
The FCA was one of the main architects of the EU’s Mifid regulation, but it promised that a post-Brexit UK would not be a ‘rule-taker’ from Brussels – a position that could lead to further differences in financial regulations between Great Britain and Europe. .
“Our proposals aim to reduce burdens on investment firms while taking into account the growth and competitiveness of UK financial services,” the FCA said on Wednesday.
Current Mifid rules require asset managers to divide the cost of buying research by all trading costs incurred in buying and selling securities. This was designed to prevent investment banks and brokers from offering research to portfolio managers to induce them to place trading orders.
Under the new proposals, research into small and medium-sized businesses with a market value of less than £ 200million – as well as income, currencies and raw materials – will no longer be subject to the rules of ‘l ‘incentive’.
Research spending by asset managers fell 20-30% following the introduction of the rule, raising fears that small businesses and innovative new businesses will have more difficulty raising funds to finance. the growth of institutional investors.
Research carried out by independent providers will also be exempt from the incentive rules.
“This will create a more level playing field and give asset managers more choice, value and quality, to the benefit of the entire market,” said Steve Kelly, Special Advisor at Euro IRP, the organization commercial for independent research providers.
Almost 80% of publicly traded companies with a market value of £ 250million or less either have no research coverage or are covered by a single analyst. The lack of information leads to less efficient pricing of their securities compared to larger listed competitors, according to the FCA.
The regulator also proposed that asset managers be allowed to pool funds to fund research on small businesses.
Joshua Maxey, managing director of Third Bridge, an independent research provider, said Mifid II created unintended consequences by cutting access to independent research and limiting coverage for small and medium-sized businesses.
“It has hurt the investment research ecosystem and stifled competition, with fund managers becoming increasingly wary of alternative research,” he said.
The FCA also suggested that investment managers no longer need to produce annual “best execution” reports detailing efforts to obtain the best prices on all transactions for clients.
In addition, broker-operated platforms should not be required to publish reports on trade execution quality metrics, intended to help market participants assess different service providers.
“No tear 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 of the Compliance and Regulatory Consulting Practice at Duff & Phelps and former FCA Regulator. .