1 00118601 Emerging themes 2019 A4 AW v31 combined - Page 66



SUPERVISION
The MiFID II regime relating to research, builds on the
rules relating to the management of conflicts of interest
and the duties of firms to act honestly, fairly and
professionally, and in the best interests of their clients.
The rules are expressed to prohibit a firm that provides
portfolio management (and a firm providing
independent advice) from receiving a non-monetary
benefit unless it is:
•An acceptable minor non-monetary benefit; or
•Research, which is either paid for out of the firm’s
own resources, or paid for out of a research
payment account.
The vast majority of portfolio managers have opted to
pay for research out of their own resources, which, under
a strict reading of the rules, means that the receipt of
such research is not an inducement. This has resulted,
however, in the allegation by some that many sell-side
institutions are pricing their research packages at well
below cost, thereby providing a substantial and
valuable benefit to the buy-side, which is not really
being paid for. And so, the argument goes, even though
the research is paid for out of a portfolio manager’s
own resources in strict compliance with the rules, the
manner in which it is priced nevertheless gives rise to
an inducement problem for the portfolio manager.
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The European Securities and Markets Authority (ESMA)
has expressly provided guidance on this issue in other
contexts, for example, in relation to corporate access.
ESMA has stated that a buy-side firm can treat
corporate access as a normal commercial service and
pay for it out of its own resources, provided that the
manner in which it is provided (including its price) does
not give rise to an inducement problem for the portfolio
manager. Such a service would then appear not to have
to constitute a minor non-monetary benefit to be
capable of receipt. There seems to be no logical basis
as to why the same principle should not be applied to
the payment for research, though the rules themselves
do not explicitly provide for it.
The key question then becomes: what level of pricing
of any service which is paid for (including research) does
not give rise to an inducement?
The pricing of research is certainly something the FCA
will be looking at during its review. Whether the pricing
level of a research package, or piece of research,
amounts to an inducement, is necessarily contextdependent, and requires an assessment of the
circumstances of both sides to the arrangement. While
it is the buy-side that has the potential inducement
problem, depending on all of the circumstances, the
manner in which the sell-side has allocated resources
to the production of that research could be relevant (but
perhaps not always). Likewise the nature of the services
being provided by the sell-side firm to the buy-side firm
in question should be relevant.

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