At the FCA’s recent asset management conference, the regulator revealed that it will be undertaking a ‘diagnostic’ review of a range of organisations on the topic of research and inducements. With more than $1bn being spent on dealing commissions, the regulator
indicated that it wants to be sure that such a vast sum is being spent wisely, and not wasted by investment firms.
The purpose of the review is for the FCA to understand how the industry has tackled compliance challenges created by the implementation of MiFID II. It is expected to start imminently and continue over the next six months. The process will begin with a questionnaire
issued to a number of different firms, followed by regulator visits to firms to meet management.
The FCA stated that it wants to understand buy-side system and controls and sell-side pricing models and commercials. It will take a ‘multi-firm’ approach, by sampling firms that are both buy and sell side, large and small, those operating Research Payment
Accounts (RPAs) and those paying for research themselves.
It is expected that the FCA will be pragmatic in their assessment, taking a risk-based approach to measures adopted to date. However, firms should be prepared to justify their approach should they be part of the scope of any such reviews, and any new guidance
that the FCA may release in conclusion of the work should be promptly and appropriately reflected.
How can firms prepare?
Senior Managers now need to think about how they have interpreted the research payment and inducement rules, and be able to justify any approach to implementation. The FCA are likely to ask challenging questions; senior managers must be ready and able to
Firms should also make sure their research agreements are in place, specifying all services and associated fees and payment terms. If operating a Research Payment Accounts (RPA), they must be able to show how the value gained from the research is measured
and quantified. They need to be sure that their admin house is in order so they can clearly indicate who is providing the research, and who is receiving payment.
Senior managers should also be confident that newly implemented systems and controls are operational and effective, including how receipt of unsolicited research is prevented. Employees must be trained on, and understand, the new obligations imposed on