As part of the investor protection framework within MiFID II, investment firms need to make explicit payments for investment research in order to demonstrate that they are not being induced to trade.
Under the upcoming MiFID II framework, free research will be considered as a non-monetary inducement for the receiving party, thereby falling within the scope of the new inducement restrictions under MiFID II. Until now, credit institutions, asset managers and other types of investment firms benefitted from free research, in the form of written reports, conferences and phone calls with analysts, with the cost of this service being built into the trading fees. As of 3 January 2018, the research provider will have to separately and explicitly charge for the research they provide.
This means that MiFID II in-scope firms will have to clearly budget for research and be transparent vis-à-vis their clients about the research received and paid for. MiFID II foresees two mechanisms for investment firms to pay for research: (i) direct P&L payment, or (ii) payment charged to the client and/or the intermediary (through commission sharing agreements) between the investment firm and the end-client by setting up a separate research payment account (RPA). This account is tightly controlled by the investment firm in respect of amount charged upfront to the client, repayment of any sums not spent and transparent overview of the research cost.
Options for payments for investment research
On top, the relevant MiFID II provisions are not limited to EU research, but touch also research providers located outside the EU. Furthermore, the restrictions are also applicable for research shared among group entities. Firms relying on (free) research will hence have to think about changing their fees model and discuss with their business partners about how to structure their future relationship under MiFID II.
By Gilles Walers, Legal Adviser – ABBL