RegulationDec 19 2014

Esma: research to be ‘unbundled’ from trading costs

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Investors could be faced with higher costs on funds after European regulators today confirmed it is toughening up the rules on the use of dealing commissions to pay for research.

The European Securities and Markets Authority (Esma) has today released its technical advice on the implementation of the Markets in Financial Instruments Directive (MiFID II).

In its paper, Esma has confirmed that the practice by which asset managers receive research from broker firms in exchange for using those brokers to execute trades should be seen as an “inducement”.

Esma has instead suggested that the obtaining of research from broker firms should only be considered not an inducement if it is directly paid for by asset managers, either from their own pocket or by raising fees for their investors.

It has proposed that asset managers and brokers sign a “commission sharing agreement”, through which the “cost of research and cost of execution are unbundled”.

The IMA welcomed the decision from Esma and said it would start working on a model for a commission sharing agreement that could be used across Europe.

IMA chief executive Daniel Godfrey said: “ESMA’s proposed approach would raise standards and reduce conflicts of interest across Europe and ensure that payments for research are clearly distinguished from payments for trading.”

The ruling will come as a blow to the asset management industry, which has argued the dealing commision ban could lead to poorer outcomes for investors and could push smaller asset management firms out of business.

Meanwhile, research from Numis suggested the dealing commission ban could hit asset management profits by as much as 5 per cent.

In addition to its rules on dealing commission, Esma’s extensive guidance covered a wide variety of areas, including new rules on high frequency trading and the use of derivatives.

Esma also outlined its proposals to force firms to “provide clients with details of all costs and charges related to their investment”.

The regulatory proposals will now be open for public comment until March 2015, after which Esma will finalise its recommendations to the European Commission, with the MiFID rules coming into force in January 2017.