On 19 September 2019, the FCA published a webpage summarising its research into how firms have implemented the MiFID II requirements relating to the unbundling of third-party research.

MiFID II bans the receipt of all monetary and non-monetary benefits by portfolio managers in relation to their services to clients, other than minor non-monetary benefits and with the exception of third party research provided it is paid from either: (i) a firm’s own resources; or (ii) a separate research payment account that is transparently funded by charges to clients and is subject to oversight requirements. The FCA rules are set out in its Handbook in COBS 2.3A and COBS 2.3B. MiFID II also requires brokers to price and supply execution services separately from research or other services, and ensure pricing of other services are not conditioned or influenced by execution payments (COBS 2.3C).

The FCA undertook a review between July 2018 and March 2019 that included a survey of 40 buy-side firms, and 10 firm visits across the buy-side and sell-side. The FCA also met 5 independent research providers and engaged with corporate issuers through trade associations.

On the webpage, the FCA presents a summary of its findings, these include:

• most buy-side firms have implemented the new rules in a way that has improved accountability and scrutiny over both research and execution costs. Most firms have chosen to absorb research costs themselves;
• most buy-side firms still have access to the research they need. The FCA found no evidence of a material reduction in research coverage, including for listed small and medium enterprises;
• there are different levels of sophistication in asset managers’ research valuation models, particularly in evaluating the quality of research;
• there are a wide range of sell-side research pricing levels. The FCA attributes this to an ongoing process of price discovery; and
• some firms have been uncertain as to how the new rules apply such as when attending trade association events, marketing research services or making contributions to consensus forecasts. The FCA has provided further clarification on its expectations in these areas.

The webpage provides more detailed feedback in the following areas:

• how firms are paying for research and passing costs on to customers;
• research budgets are shrinking;
• best execution and order routing are improving;
• there is wide variation in how firms evaluate and decide payment for research;
• there is limited evidence of a decline in research quality and coverage;
• firms have concerns about consensus forecasts;
• there is some uncertainty about non-monetary benefits outside research agreements;
• there are wide variations in oversight of delegation arrangements;
• firms do not commonly share research intragroup;
• firms’ approaches to corporate access services are evolving;
• sell-side research pricing models remain highly varied; and
• independent research providers have concerns over competition.

The FCA reports that firms are continuing to develop their arrangements and a market for separately priced research is still emerging. It intends to undertake further work in 12 to 24 months’ time.

The FCA also observes that price discovery is still evolving, alongside refinements to valuation and budgeting approaches on the buy-side. This may result in further changes to sell-side pricing models and competition in the research market. It is therefore likely that the FCA will conduct further work to assess the impact of these reforms in 2020/21.