Hardly Diverging

Almost at the very end of the fourth month after our final separation from EU legislation, the FCA published its first proposals for going it alone. CP21/9 sets out its grandly entitled Changes to MiFID’s Conduct and Organisational Requirements. But be ready for disappointment. If this is what Brexit is all about, we could have saved ourselves a lot of bother.

Over the years, MiFID has caused much grief and MiFID II did nothing to alleviate that. So there is much that could be done to improve the unhappy lot of MiFID firms. Now with a free hand, the regulator can swing the axe and fell the monstrous beanstalk that the giant has so often used to clamber down to frustrate British efforts to build the biggest and best financial services industry in the world. So here we go – the EU has proposed some modest trimming of the research acquisition requirements, so the FCA proposes to do much the same. 

All right, maybe it is not as daft as all that. After all, if the EU is going to get of rid of some of MiFID, why wouldn’t we? Indeed, if we didn’t, we would be left clinging to the wreckage of their failed measures while they swam away. So it’s not just an easy start, undemanding of major justification for divergence which might ultimately destroy all prospect of equivalence. It is in fact a catchup measure motivated partly by a wish to pick the low hangers and partly by FOMO. Lurking there in the Consultation’s Summary is a ref to competitiveness, that banished concept, fingered as the race-to-the-bottom culprit for the banking crisis of a dozen years ago. We do not wish to be left behind.

Betting men will say that a couple of these changes will have no objectors at all – none, anywhere. The FCA reveals what we already knew, that the intended audience for the best execution reports now to be dropped have never read them. And some firms even ventured that they had never once received an enquiry about any of the data so lovingly – and expensively – collected and published. In fact, as failed regulations go, they are right up there. If this had been a private sector project, heads would be rolling – but euro-heads seldom role, they just slide quietly into new programmes in quite different sectors, trying their hands at health-care procurement and that sort of thing. So, no mourners for RTS 27 or 28. Not one.

But research acquisition is more interesting territory. For a start, it was FCA that pressed for its control in MiFID II. The concept of removing the scope for extravagant use of clients’ money to buy excessive amounts of research has its sympathisers. And the FCA provides some decently convincing research that shows it actually has not done much harm either. The famously predicted annihilation of SME research coverage really has not happened – there just wasn’t a lot of it about in the first place. But why the divergence from the EU plan to remove the requirements for research on any company under €1bn market capitalisation.? Because the problem lies right at the bottom, with 98% of the companies with no research coverage having a market cap of less than £250m. Add to that a few related stats and you quickly get to the FCA position of capping the concession at £200m. And why did the EU go higher? Perhaps because they did not do the analysis, possibly because they perceive a race-to-the-bottom advantage, but probably because they view the whole measure as an ill-conceived British concept that they are now free to dismantle in stages. So who is the greater diverger?

Fortunately FCA has also identified another sector where there has been no discernible advantage from the research regime. As there has been no change detected in FICC (fixed income, currencies and commodities) spreads since the application of the MiFID II requirements, there really does not seem to be a benefit in forcing the research producers to charge extra for their output. So, apparently, no loss there. And it is fair to assume that there will not be much controversy about disapplication of controls over research that is available free to the general public – rather, perhaps, that it is difficult to see how you persuade anyone to pay for it in the first place. But the proposed disapplication to research provided by independents is a bit more puzzling. Given that the definition of ‘independent’ in this area is a firm with no link to trade execution, it is difficult to put one’s finger on the benefit derived from lifting the ban on using research as an inducement to use the firm’s, er, trade execution services. That might explain why the FCA gave up the unequal task of providing its own explanation. The best argument, that the requirements are redundant in this area and therefore pass no CBA, fails to feature.

But, for the true connoisseur, the real pleasure lies in the chosen mechanism for disapplication. No elaborate narrowing of the application rules here; just an adjustment to the definition of a minor non-monetary benefit, now to include the four areas of concession. Tempting as it might be to suggest that this was driven by neatness of drafting, despite the distortion of the concept of a MNMB, it seems the cunning plan is to avert the need for firms to plead with clients to sign new agreements that allows the benefits to be rebundled. 

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