The consultation proposes changes to rules on research and best execution reporting.

By Rob Moulton, Nicola Higgs, David Berman, and Charlotte Collins

On 28 April 2021, the FCA published a Consultation Paper (CP21/9) on proposed changes to UK MiFID relating to research unbundling and best execution — two areas covered by the EU “quick fix” changes to MiFID II last summer. However, the FCA’s proposals differ from the changes made in the EU, with the FCA noting that they reflect the different circumstances in the UK and the FCA’s own analysis as to how best to improve the regime.

The MiFID II research unbundling rules have always been very closely associated with the FCA, and so any change in this area may be seen as a significant concession by the FCA. The regulator is therefore at pains to stress that it is making only targeted amendments and that the regime overall is working well and achieving its aims. Further, it has proposed a much less generous threshold for its planned exemption for SME research than the EU equivalent, citing various data in support of its position. It also focuses its reasons for the change on wider capital markets reforms and future developments, rather than suggesting that the MiFID II rules have created an issue that requires fixing.


The FCA proposes to create several new exclusions from the inducements rule for certain types of research. It intends to do this by adding to the list of acceptable minor non-monetary benefits — meaning asset managers would no longer need to unbundle costs for research falling within these categories from their execution costs.

First, the FCA considers that introducing an exemption from the inducements rule for research relating to an SME with a market capitalisation below £200 million may go some way to addressing the low levels of research on SMEs. The £200 million threshold would be assessed for the 36 calendar months preceding the provision of the research. This threshold is set much lower than the equivalent amendment made under the EU “quick fix” amendments, which set the threshold at €1 billion. The FCA’s analysis indicates that its proposed threshold better targets SME companies where investment research coverage is at its poorest, based on data indicating that almost all companies above this threshold have some form of coverage already. Therefore, the FCA considers that setting the exemption at this level would achieve the greatest benefit, whilst keeping inducement and conflict of interests risks low.

The FCA explains that, while it believes the research unbundling rules are working well, research coverage for SMEs remains low, and a significant number of companies at the smaller end of the scale do not have any research coverage. Considering the FCA’s wider goals relating to improving primary markets and SME financing, the regulator is concerned about the impact of research unbundling on market functionality and believes this justifies revisiting the rules in this specific case (the FCA is not considering revising the research unbundling rules more widely). The FCA acknowledges that changing the research unbundling rules alone will not solve the issues in relation to SME funding. It also acknowledges that asset managers have invested significant resources and costs in meeting the unbundling requirements and may not be able to easily “rebundle” some research. However, the FCA considers that allowing SME research to be bundled could help to increase research coverage.

The FCA also proposes an exemption for fixed income, currencies and commodities (FICC) research, which would apply where research is received in connection with an investment strategy primarily relating to FICC instruments. The FCA’s rationale for this proposal is that because of the way in which brokers earn their revenues on FICC transactions (via the spread rather than from commission), there should not be an increased inducement or conflict risk.

Finally, the FCA is proposing to include research provided by independent research providers and openly available research in the list of minor non-monetary benefits. Research from independent providers would be exempt from the inducement rules where the independent 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. Written material that is made openly available from a third party to any firms wishing to receive it or to the general public would also be exempt. The FCA proposes that, in this context, “openly available” would mean accessible without conditions or barriers such as a log-in, sign up, or submission of user information. The FCA believes that both of these additions may encourage greater production and consumption of these types of research, with little impact on inducement risk. However, it seems unlikely that the exemption for openly available research will encourage the production of this type of research, as most research is not retail-compliant and if producers cannot apply any barriers they cannot ensure that their research only reaches wholesale users.

Best Execution

The FCA proposes to remove the requirements to produce RTS 27 and RTS 28 reports entirely. This differs from the EU approach, where the obligation to produce RTS 27 reports has been temporarily suspended for two years, while the European Commission assesses whether to revise the requirements or delete them permanently. These reporting requirements were intended to enable market participants to better evaluate the execution services being provided to them, but have been costly and complex for firms to produce. The FCA has found that the reports are not being viewed by the intended audience, and various firms report that they have never received enquiries from their clients about the data they are publishing pursuant to these obligations.

The feedback received by the FCA indicates that the data in RTS 27 reports are too complex and hard to analyse, and several months out of date by the time they are published, whilst the data in RTS 28 reports are too generalised to be of use. Consequently, the FCA has found that market participants typically use other data to make their assessments. The FCA did consider changing the reports to make them more useful. However, it found that there is no type of aggregated report that would be sufficiently useful, since the most useful information for clients is information that is tailored to the business they undertake with the firm or venue.

The FCA notes that, for some firms that are required to produce RTS 27 and RTS 28 reports, the obligations lie in the UK MiFID delegated regulation. This legislation will need to be amended by HM Treasury, and the FCA’s proposed changes to the Handbook are dependent upon such changes.

For the time being, and until any changes are finalised, firms can continue to rely on the FCA’s statement made in March that it will not take action against firms that do not produce RTS 27 reports during 2021.

Next Steps

Comments are requested by 23 June 2021. The FCA expects to publish a Policy Statement in the second half of 2021.

The proposals in CP21/9 tie in with the wider work the FCA is undertaking alongside HM Treasury on capital markets reform. A planned HM Treasury consultation this summer will look at the broad themes of capital markets reform and cover a range of high-level and more detailed questions. The FCA plans to publish at least two other related consultation papers this year. The first consultation paper (due before the summer) will look at the consequences of LIBOR transition for the derivatives trading obligation. The second consultation paper (due after the summer) will look at changes to markets requirements.

The FCA notes that certain other changes in the EU MiFID “quick fix” package that are not covered by CP21/9 are best made through changes to the UK MiFID delegated regulation, which HM Treasury will consult on in due course. These include changes to costs and charges disclosures for wholesale clients, reporting to wholesale clients, electronic communications with clients, and provisions linked to the RTS 27 and RTS 28 obligations (discussed above).