Compliance Update – September 201726th September 2017
Welcome to our September compliance update. In this issue, we investigate the recent flood of fund managers opting to pay for research from P&L and the implications of this in Europe and beyond, highlighting FCA’s approach to MiFID enforcement. We also share some statistics which show the market environment is ripe for stock picking which is good news for trade ideas and active investors. Lastly, we report on some items closer to home; trends in trade ideas rewards programmes, MAR quarterly reports and TIM’s restricted list feature. Enjoy!
The shift to paying for research from P&L will have industry-wide ramifications
Recent announcements from the largest US fund managers have triggered many European managers to announce that they will pay for research from their own balance sheet, rather than from client funds. Some large firms such as Schroders and Invesco have reversed previous public statements that they would continue to charge clients for research directly, and will now pay from their P&L. At TIM, we believe that this change in approach means the new regulations will have a much more significant impact on our industry than previously anticipated. The effects are likely to include:
- Lower profits for European fund managers and a particular squeeze on smaller European funds that may suffer outflows, lower profits, lower performance, or all three
- A decline in payments for research, putting further pressure on broker research departments
Read our blog article where we explore the effects in detail.
Pressure from US asset owners?
Many think that European buy-sides will be at a disadvantage to their US counterparts in paying for research from their own P&L. This is because so far, US firms who have announced that they are paying from P&L are limiting this to their EU clients. For non-EU clients it is business as usual. This may change as a number of large US asset owners, such as state pension funds, have already expressed an interest in having the same transparency into their US funds’ costs as provided under MiFID II in Europe.
FCA comments on MiFID enforcement
In a speech to AFME on 20 Sep, Mike Stewart, Director of Enforcement and Market Oversight at the FCA highlighted their approach to enforcement will be practical and realistic. He recognised the complexity and magnitude of the change, “we have no intention of taking enforcement action against firms for not meeting all requirements straight away where there is evidence they have taken sufficient steps to meet the new obligations by the start-date, 3 January 2018.” He warned companies who have done little to prepare for the change, “our disposition is likely to be different where firms have made no real or genuine attempt to be ready or where key obligations are deliberately flouted.”
With all the new data being collected, Mike Stewart “expects a sea change in our ability to view the whole market” allowing detection of misconduct earlier. FCA have already seen a 75% increase in the number of investigations in recent times and this additional data, and plans to collect more data, will see that trend continue.
Stock Picking back in Vogue
The Financial Times has recently commented on a dramatic fall in stock correlations, favouring active managers and stock-picking. We see the effects in TIM where our contributors are significantly outperforming the market both on the long side and against market-neutral benchmarks.
Research budgeting and valuation
The most common approach to research valuation is to ask portfolio managers to rate research on a four or five-star rating. Linked to consumption statistics, this approach likely meets regulatory needs. In addition, some firms are considering predictive accuracy as part of the mix, particularly when selecting new research providers. TIM is is working with its partners to evaluate analyst research for its predictive accuracy.
Some buy-sides are setting aside part of the research budget (whether client-funded or from P&L) for discretionary spending. The buy-side can assure its Portfolio Managers they will have access to major research providers, whilst retaining some flexibility in spend.
MAR investmentment recommendations quarterly reports (Article 6.3) Q3 due soon
TIM MAR provides a fully compliant solution including disclosure requirement Article 6.3, commonly known as the Quarterly Report. With the end of Q3 approaching, we will be working with our TIM MAR users to meet this disclosure requirement. We have 32 clients using our TIM MAR solution and continue to see a steady flow of new brokers joining TIM to be compliant. If you have any questions on the TIM MAR product, please contact us at email@example.com.
Restricted Lists – should TIM block ideas or not?
TIM’s Restricted List feature allows sell-side firms to upload lists of restricted stocks into the platform. Authors are then instantly alerted when they attempt to enter an idea for a stock that is restricted, and their attention is drawn to stocks that have become restricted since their trade idea was entered. TIM now closes associated trade ideas when stocks become restricted. This improves compliance and reduces the burden on both authors and compliance staff in adhering to and monitoring restrictions.
TIM Ideas today warns authors about stock restrictions, but does not prevent idea submission. The author must still decide if the idea is allowed. Some of our clients would like to prevent idea submission, by not allowing an author to submit a trade idea for a restricted stock. We’d like to hear your views on this topic, whether you use the feature or not. Please contact us at firstname.lastname@example.org.
TIM’s Restricted List feature is becoming increasingly popular among both large brokers and the mid-tier. Let us know if you would like to learn more about TIM compliance features.