There now remains a little over three months before MiFID II takes effect on 3 January 2018. Given the international reach and inter-connectedness of global financial markets, it comes as no surprise that the legislation’s impact extends beyond the EU to other parts of the globe whose firms either provide or receive services from EU financial counter-parties. Rules around inducements form a major part of the innovations introduced under MiFID II, having the objective of better protecting the ultimate client and increasing clarity over the quality of the services provided.
In what amounts to an extension of the UK’s Retail Distribution Review regime, MiFID II tightens the rules generally over the receipt of fees, commissions and non-monetary benefits provided by third parties. Portfolio managers and investment firms offering independent advice are prohibited entirely from receiving all, but minor benefits (e.g. participating in conferences or seminars) which are capable of enhancing the quality of service and are disclosed to clients. Potentially, this could affect distribution models where third-country firms rely on EU intermediaries in return for providing remuneration or other forms of sales support. One of the most significant changes that is likely to impact third-country firms are those on inducements relating to research.
The intention is to improve transparency and accountability over costs to investors, as well as increasing competition in the market for research. In a significant strengthening of the rules, MiFID II provides that in order for third party research not to be regarded as an inducement for an investment firm, it must be received in return for a direct payment by a buy-side firm out of its own resources, or payments from a separate research payment account controlled by that firm.
Although the MiFID II restrictions will not be directly applicable to third-country firms, they will have an indirect effect on their business. Third-country brokers will no longer be able to provide EU-based investment managers which are subject to MiFID II (in the UK this will include AIFMs) with research bundled up with the cost of dealing and execution. In theory, third-country firms will still be able to receive bundled research from EU-based brokers – at least according to the FCA’s interpretation of the rules – but EU-based brokers may have changed their business model charging instead for research.
These rules have the capacity to cause, at the very least, administrative and compliance issues where research is either received or provided in respect of a variety of jurisdictions each with their own rules. Third-party firms will need to evaluate the impact of MiFID II on their businesses as a matter of priority based on whether they provide investment services to EU-based clients and, if they have EU counter-parties.