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Compliance Update – November 2017

30th November 2017

Welcome to our monthly compliance update. In this issue, we share:

  • The possible alternative futures as a result of research unbundling, discussed in our recent webinar
  • Trade ideas can be paid for from client funds, recent confirmation from the FCA
  • How MiFID II affects VAT treatment of research, draft guidance from AIMA
  • The Unintended Consequences of MiFID II, highlights from a recent conference
  • TIM’s Restricted List feature – how it helps protect sell sides and buy sides in their trade idea communications

Missed our recent TIM Webinar?

We recently held a webinar entitled “The new role of alpha in research valuation”. The webinar recording is available here.

In this short webinar, we share our concern that high quality research is under threat. The “all-you-can-eat” model, the low price levels being arrived at, and a focus by the buy-side on compliance rather than finding true value, could drive out high quality research, resulting in poorer returns for investors.

In order for this not to happen we highlight the importance that market participants, especially the buy-side, invest in the process to ensure the best, most insightful research is effectively nourished and given full value.

Listen to Mike Carrodus, CEO of Substantive Research, and Colin Berthoud, Founding Partner of TIM, as they cover best practices for finding and evaluating both internal and external research that add value, generating alpha.

FCA clarifies that trade ideas can be paid for from client funds

In his speech at the Unbundling Uncovered conference we highlighted in our previous newsletter, Adam Wreglesworth of the FCA covered various aspects of unbundling. He gave the example of a sales trader providing a trade idea with some form of justification and stated that this should be considered substantive research and as such should be paid for – and can be paid for from client funds.

AIMA reports on HMRC draft guidance addressing the VAT treatment of research post MiFID II

The UK’s HM Revenue & Customs has circulated draft guidance addressing the VAT treatment of research from 3 January 2018, when rules introduced in MiFID II concerning the payment by investment firms for research services come into effect.

The draft guidance concludes that supplies of research will be taxable from that date and the current “bundling” treatment for research supplied with exempt financial intermediary supplies will no longer be available. HMRC also accepts that the supply of research may, in particular (and narrow) circumstances, fall within the VAT exemption for management of special investment funds.

AIMA is working with other industry bodies coordinated by AFME to respond to HMRC

The Unintended Consequences of MiFID II

Introducing a change in the markets will always result in unintended consequences. This was the theme of a conference we recently attended entitled “The Unintended Consequences of MiFID II”. Here are some of the interesting points raised:

  • Focus on implementation over intent – many firms are treating the change as a box-ticking exercise as opposed to understanding the intent of the rules. E.g. a delta on your research spend means you’ve done it well, as opposed to the investment process being more cost-effective.
  • Smaller firms are disadvantaged – firms without the scale, internal resource and budget will face pressure on their operations. This may result in consolidation or moving out of the EU.

Concern over less efficient markets – if more research budget is directed on internal research, analysts will move from the sell side to the buy side, leading to less published information in the markets. In addition, rules are resulting in a general disincentive to buy research, again reducing the information flows.

TIM Restricted List feature helps reduce risk

Increasing numbers of sell-sides are implementing their Restricted Lists in TIM. The restricted lists implementation is reassuring for both idea contributors and buy-side recipients because it minimises the risk of inadvertently giving insider information. If you are not familiar with the feature, TIM can either provide a warning when a salesperson enters an idea on a stock on the restricted list, or block it altogether. Salespeople are also notified when an existing idea is on a stock that is added to the restricted list, enabling them to take the appropriate action. For more information, contact us on