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FCA Mifid probe should address research 'conflicts'

FCA Mifid probe should address research 'conflicts'

Consultants expect the Financial Conduct Authority's probe into how fund managers pay for research post-Mifid II to address potential conflicts. 

The watchdog launched its investigation on concern over inconsistencies in the way fund managers are interpreting the new rules, which were introduced in 3 January. 

Under the new Mifid regime, asset managers have to unbundle research costs from transactions charges and trading commissions to give investors greater transparency on overall fund costs. 

Research platform Eric (Electronic Research Interchange) welcomed the FCA's intervention, after becoming aware of a 'varying' approach to how Mifid is applied by providers and asset managers. 

Eric co-founder Chris Turnbull (pictured below) believes this inconsistency relates to a specific lack of guidance from the regulator. 

'[In particular] we are increasingly concerned about the process of monitoring interactions, which suggests that some managers are still using broker voting to determine who gets paid what for research is consumed,' Turnbull said. 

'Rewarding for research services on an ex-post, rather than ex-ante seems very similar to the process pre-Mifid ll. This is in direct conflict with the aims of the regulations and unlikely to change without the influence of the regulator.' 

The FCA intends to contact fund managers, investment banks and brokers over the next few weeks to determine how the system is functioning. 

Mhairi Jackson, a manager with the FCA’s wholesale conduct policy team, admitted the market is yet to determine the best price for research. She also said there was concern that investment banks might be offering 'unduly favourable terms' for their research. 

'Any all-you-can-eat research offerings are potentially more prone to fall short of the spirit of the Mifid rules.' Jackson said.

Andrew Glessing, head of regulation at asset asset management consultancy Alpha FMC, noted that dealing with corporate access and investment research conflicts has been high on the FCA’s agenda for some years.

He indicated the regulator will be paying close attention to two things in particular during its probe. 

'Firstly in a changing investment research market, is the new model is delivering the inducement- free outcomes it seeks and secondly, can firms can demonstrate that they have embedded the right governance and controls needed, whether as providers or buy-side consumers of research and corporate access?' Glessing said. 

One of the biggest problems with the new rules was the disparity it created between Europe and the US and Asia. 

Michael McKee, partner at DLA Piper, said: 'It is common for the regulator to undertake post-implementation reviews but always interesting to see what they look at first.

'The research changes were one of the most controversial aspects of Mifid II and the impact these have had on the market is important to assess. The EU law changes mean the EU has cut itself off from the approach of the rest of the world – causing problems for US research providers in particular.' 



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