The Financial Conduct Authority (FCA) has announced a raft of potential changes to the Mifid regulations in the UK.
The watchdog today (April 28) released a consultation paper on the regulation, asking the industry for feedback on a number of changes to the research activities which fall under the rules.
The FCA is proposing that research on SMEs with a market cap of below £200m are exempt from the Mifid regulations, due to investors being impacted by poor levels of coverage on these smaller firms.
The city watchdog said 79 per cent of public companies with a market cap of below £250m either had no research coverage or were covered by a sole analyst, which it said constituted as “levels of coverage which may be insufficient to provide a fully informed view for investors”.
The FCA is also asking for feedback on an alternative proposal to create a research pool for these smaller firms. The initiative, which the FCA recommends be market-led, would be funded by relevant firms contributing through their own P&L accounts.
The watchdog added that although there is some willingness in the industry for this initiative, at present there is uncertainty over who would take the proposal forward.
The regulator will also unbundle fixed income, currency and commodities (FICC) research from Mifid regulations. The rationale for this, it says, is that FICC transactions are typically not paid for directly, and the broker earns revenue from the trade’s spread.
“Therefore, the proposed exemption for FICC research does not create the same opacity risks between transaction fees and research costs that arise for equity research.”
Finally, the FCA will also provide an exemption to the regulation for research provided by independent research providers (IRPs) where the provider is not engaged in execution services and is not part of a financial services group that includes an investment firm with execution or brokerage services.
The aim of this is to encourage the take-up of independent research and to help address uncertainty among those who buy research.
The regulator said: “We consider that this proposal would pose little risk, as the exemption will only apply to IRPs who are not engaged directly, or in the same group as a firm engaged in, execution and brokerage services.”
Also excluded from the list of minor non-monetary benefits will be written material that is made freely available to the general public, or to those who wish to receive it.
The consultation paper added that the introduction of reporting requirements for execution venues (RTS 27) and for firms executing and transmitting client orders (RTS 28) to make public information on execution quality and order routing had not achieved their policy goal, and are proposing to remove the regulations.
The deadline for feedback on the consultation is June 23, 2021.