EU’s New Regime on Payments for Research, Use of Dealing Commissions

The MiFID II regime will have ramifications for buy-side global asset managers and sell-side research providers relating to use of dealing commissions and cost allocation for research expenditures.

By far the most controversial area of the European Union’s Markets in Financial Instruments Directive II (MiFID II) reforms has been that relating to the methods of payment by portfolio managers for research produced by investment banks, brokers, and independent research providers. This reform should come as no surprise to the industry; it had long been foreshadowed in the United Kingdom by the Financial Conduct Authority (FCA), which in November 2012 highlighted the conflicts of interest faced by the UK asset management industry following the regulator’s thematic review from June 2011 to February 2012 on the arrangements UK portfolio managers had in place for managing conflicts of interest—including with specific reference to the use of customer commissions.

In October 2013, FCA announced that it was carrying out a wider review on whether reform was needed to the use of dealing commission (formerly known as “soft commission”) regime in the UK “to deliver a more transparent and efficient asset management sector for the benefit of end investors”. Following its further thematic review from November 2013 to February 2014, FCA published a discussion paper in July 2014 which featured FCA’s conclusions that