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Compliance Update – July 2017

19th July 2017

Welcome to our July compliance update! In this issue we shine a light into some of the darker corners of the current regulatory space:

  • From 2018, the FCA will require Senior Managers on the buy side to fulfil the requirements laid out in the Senior Managers and Certification Regime (SMCR). Might the FCA use the SMCR for MiFID II enforcement?
  • Extra-territoriality – Can European brokers accept bundled payments from clients outside the MiFID II regulations?
  • Corporate access – who will pay for corporate access services?
  • Is there potential value in MAR investment recommendation disclosure data?

Senior Manager Certification Regime and MiFID II enforcement

The Senior Managers and Certification Regime (SMCR) makes it easier for firms and regulators to be clear about who is responsible for what. In 2016, the Bank of England and Financial Services Act 2016 introduced the “Duty of Responsibility,” empowering the FCA to take action against Senior Managers responsible for activities that contravene a regulatory requirement. Initially, the FCA applied the Duty of Responsibility to banks, as PS17/9 – published in May 2017 – makes clear. However, on 7 March 2017 the FCA said it would extend the SMCR to all sectors of the financial services industry, including buy sides, and expects implementation to begin in 2018.

Mark Steward, Director of Enforcement and Market Oversight at the FCA, gave a speech earlier this year on 31 March 2017 outlining the various enforcement actions he has taken, and the need to enforce action against individuals as well as firms. We interpret this speech as an indication of the SMCR being used as a primary means of enforcement for regulatory infringements on both the buy side and sell side, in addition to corporate enforcement. It seems to us that this is the approach the FCA will take with regard to MiFID II.

Extra-territoriality – can European brokers accept bundled payments from clients excluded from MiFID II regulations?

Early this year clients began asking us whether MiFID II unbundling will apply to them if they are not regulated in Europe. It was clear at the time that the regulation does not extend to asset managers regulated outside Europe. However, it was less clear whether those overseas clients could pay brokers in a bundled way.

The FCA helpfully clarified the situation in its July 2017 Policy Statement on MiFID II Implementation. Here is the actual wording (from page 50):

“We have clarified the scope of COBS 2.3C – the requirement on brokers to price execution and research or other services separately – to make clear that investment firms do not have to price separately to third country firms based outside the EEA, although they may choose to do so voluntarily.”

So if you want to pay for trade ideas (or research) via a CSA, and your firm is based outside the EEA, it seems you can do so.

Of course, this does not work the other way around. If a fund is regulated under MiFID II, it must pay for research and execution services from outside MiFID II jurisdictions in a MiFID II compliant manner (as clarified in Section 7, Question 4 of ESMA’s 6 June MiFID II and MiFIR Q&A).

Corporate access – who will pay for corporate access services?

The FCA has long been pushing for corporate access payments to be made from fund P&L rather than client funds. ESMA is also clear (as clarified in Section 7, Question 7 of ESMA’s 6 June MiFID II and MiFIR Q&A) that corporate access is not substantive research. However, ESMA says that corporate access can use valuable resources, so may risk becoming an inducement to trade. Brokers and their clients need to take care to ensure they are charging fairly for corporate access – or use a third party service that is not conflicted.

If corporate access must be paid for, who will pay – the corporate, or the investor? A recent poll by ingage suggests that in the future, corporate access fees will be shared between both parties.

Might MAR investment recommendation disclosures be valuable beyond compliance?

It has been a year since the Market Abuse Regulation came into force and salespeople became designated “experts” who must disclose conflicts of interest. In that time, our 30 sell-side firms have built up a significant track record of investment recommendation disclosures. We have had enquiries from our quant customers as to whether they can access this history. We’ll be discussing the opportunity with our brokers.