- research on listed or unlisted companies who have a market capitalisation below £200m provided it is offered on a bundled basis or provided for free. - In a change from CP21/29, and in an effort to reduce churn of qualifying companies and ensure operational simplicity, the market cap is to be calculated with reference to the average closing price of the shares of the company at the end of each month to 31 October for the preceding 24 months (rather than being calculated with reference to the end-of-year quotes for the 36 calendar months preceding the provision of research, as had been proposed in the consultation). Specific provisions are also included for companies newly admitted to trading.
- corporate access services which relate to listed or unlisted companies with a market capitalisation below £200m (calculated as above). – This is a new change not contemplated in CP21/29. Although it is helpful for the FCA to put beyond doubt that corporate access relating to relevant SMEs constitutes a MNMB, it is also a reminder that firms should consider carefully their approach to receiving corporate access more broadly under the inducement rules.
- third party research that is received by a firm providing investment services or ancillary services to clients where it relates to FICC. - In a change from CP21/29, the FICC exemption no longer requires the recipient firm to be using the research for an investment strategy primarily relating to FICC, but rather that the research itself must relate to FICC. The policy statement also notes that the FCA view it as acceptable for the recipient firm to rely on representations from research providers that they are supplying FICC research (although this statement is not reflected in the rules). Although this will likely be operationally easier for firms and expands the scope of buy side firms able to benefit from the MNMB treatment, it arguably also narrows the scope of the research which can be treated as an MNMB under this exemption and potentially introduces complexities in determining whether research reports “relate to” FICC instruments and therefore can be treated as an MNMB, for example where the research touches on non-FICC asset classes to any extent. See also the comment on macro-economic research below.
- research received from a research provider where the research provider is not engaged in execution services and is not part of a financial services group that includes an investment firm that offers execution or brokerage services. - In a slight change from CP21/29, the exemption no longer refers to an “independent” research provider, to avoid the suggestion that investment research provided by firms that do not fall within this exclusion could not be independent; and
- written material that is made openly available from a third party to any firm wishing to receive it or to the general public. “Openly available” in this context means that there are no conditions or barriers to accessing the written material other than those which are necessary to comply with relevant regulatory obligations, for example by requiring a log-in, sign-up or submission of user information in order to access that material. - In a welcome change from CP21/29, the FCA have clarified that materials will still be considered “openly available” even if subject to conditions on access, provided such conditions are necessary to comply with relevant regulatory obligations. In order to demonstrate that any such conditions are “necessary”, the FCA suggests that firms will need to be able to show that any access restrictions are proportionate, and how they have otherwise sought to ensure that access is as frictionless as possible (although this commentary has not been reflected in the Handbook text).
- keeping the market capitalisation for the SME exemptions at £200m, despite requests to raise it and / or align it with the EUR 1bn threshold under the EU MiFID Quick Fix – the FCA consider the £200m threshold to be set at the right level, and that the aligning the threshold with the EU’s would reintroduce material bundling of fees and unacceptably high inducement risk in the UK market;
- rejecting the suggestion that the FICC exemption should be extended to include macro-economic research, on the basis that this may often explicitly or implicitly suggest an investment strategy and be a chargeable service for some major firms, as well as include elements of other types of research (e.g. equities); and
- the implications of the exemptions on the application of the SEC no-action letters for research where research benefiting from the MNMB treatment continues to be specifically paid for. The FCA notes it is not appropriate for them to comment on the application of the SEC no-action letters, but firms may wish to consider this further, as well as the implications of the MNMB treatment on any existing related contractual arrangements.
Best execution reporting:
- From 1 December 2021, UK RTS 27 and 28 best execution reporting obligations will be removed (noting that the FCA has already stated this year that they would not take action against firms who do not produce RTS 27 reports during 2021). This will be a very welcome development – especially since RTS 28 reports were not disapplied under the EU’s MiFID Quick Fix or the recent Commission legislative proposals to change MiFID II following the EU MiFID II Review.
- Several related changes were made to the UK MiFID II Delegated Regulation through the “UK Quick Fix SI” in June, and these (like the FCA Handbook changes) take effect on 1 December. These include the removal of RTS 27 and 28 reporting obligations for trading venues and the removal of RTS 28 reports in relation to the services of reception and transmission of orders and portfolio management.
- Firms will need to consider whether any of their existing disclosures or client facing materials (e.g., terms, websites, best execution policies) which reference RTS 27 or 28 best execution reports need to be amended to reflect that firms will no longer produce these.
- It is worth noting that one response to the FCA’s consultation advocated against a removal of RTS 27/28, which prompted the FCA to state that it will keep the removal of RTS 27 and 28 requirements under review “as part of the Wholesale Markets Review including on market data”.
Documents and further reading
FCA Policy Statement 21/20 can be accessed here, and the related FCA press release / webpage is here.
Our client note on the UK’s MiFID II quick fix SI, published in June 2021, is here.
Our client notes on the EU MiFID II quick fix are here and (on the changes to the commodity derivatives regime) here.
Our client note on HM Treasury’s consultation on the Wholesale Markets Review is here, and our webinar on the proposals can be accessed here.
Our client note on the European Commission’s recent legislative proposals for changes to EU MiFIR and MiFID II, following the EU MiFID II Review, is here.
