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Payments for Research – The View from Frankfurt
The FCA published the findings of their multi-firm review into MiFID II research unbundling rules on 19 September 2019 and the headline was that they were broadly satisfied with how MiFID II was proceeding. The trends towards asset management companies using their own money, together with increased focus on evaluating research quality has resulted in what the FCA estimate to be a £70 million fall in research expenditure in the first quarter of 2018.
The FCA's view in matters relating to research payments are well known. Less well known are the thoughts of their counterparts in Germany. To rectify this, in early September my colleague David Cook and I spent a day in Frankfurt and visited the Securities Supervision and Consumer Protection at BaFin (or Bundesanstalt für Finanzdienstleistungsaufsicht to give the full title).
The MiFID II negotiations on research could be said to have been a discussion between over 30 countries but dominated by the distinct vantage points of only two; France's AMF (less need for new rules and regulation, comfortable with customer money continuing to be used to pay for research) and the UK's FCA (fundamental conflicts of interest in payment model necessitating radical change).
BaFin occupied the middle ground between the UK and France in the research rule negotiations but argued then, and continue to argue strongly in favour of inducements, going against the consensus in this area. In the view of German authorities, for the retail customers of the Sparkassen (German Savings Banks), inducements provide real value and they have aimed to provide a safe harbour from some related regulations. Despite internal discussions in Germany on this position, we don't expect any change in this viewpoint following a future formal MiFID II review.
The imposition of telephone taping requirements is also problematic for Germany for historical and practical reasons. In contrast, the German view is anathema to the UK regulator which has viewed implementation of MiFID II as a way of ensuring the complete removal of inducements, which they see as introducing conflicts of interest. We expect that BaFin will continue to operate a hard line against telephone taping in future discussions.
Importantly, Germany continues to be sceptical on the need for any research payment rules. France, through the AMF, want to review and ultimately roll back regulation this area. Both the German and French regulators (and the German Finance Ministry) are particularly focused on the adverse effect of MiFID II on coverage of small and medium sized companies (SMEs). We expect that regulators will carve out or in some way relax the payments for research rules for coverage of SMEs; the consensus is that the ongoing decline in SME coverage is a market failure.
Lastly there is the political angle. The FCA of course has recently declared their broad satisfaction with MiFID II in this area. But it is certainly difficult to contemplate a situation where Brexit, at least in the short term, leads to an increase in the influence of the FCA. The MIFID2 review is coming and the balance of the original compromise may be unpicked, meaning, after Brexit, we may see a relaxation of regulations, led by the AMF and supported by BaFin. More on Brexit as and when it happens.
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