Greg Kilminster
Head of Product - Content
FCA issues CP24/7 on investment research payment options
The Financial Conduct Authority (FCA) has released a consultation paper (CP) 24/7, which proposes a new way of paying for investment research.
Some context
The CP stems from the recommendations made in the Independent Research Review (IRR) launched by the UK government as part of the Edinburg Reforms.
The IRR aimed to evaluate the level of investment research in the UK’s financial services industry and its contribution to the competitiveness of UK capital markets.
Currently, the UK’s rules, which derive from MiFID II, prohibit UK asset managers from purchasing research with bundled payments, except when payments are made from a Research Payment Account. The IRR identified several concerns regarding the impact of the rules:
- MiFID II has not led to more transparent pricing or greater availability of different sources of research.
- The Research Payment Account is complex and rarely used.
- Asset managers paying for external research from their own resources (the P&L model) have reduced the amount spent on external research, leading to a decline in the quality and availability of research.
- Payment for research via the P&L model may not be sustainable or may be subject to further reduction.
- Greater regulatory requirements for the appointment of researchers have led some asset managers to limit the number of research providers.
- Reduced research spending has resulted in less willingness to engage in speculative and innovative research, including in niche and growth areas such as ESG-related companies and issues.
To address these concerns, the IRR recommended additional optionality in paying for research—the FCA’s CP24/7 results from considering this recommendation.
Key proposals
The key proposals in CP24/7 aim to give asset managers more flexibility in paying for research. This will allow the bundling of payments for third-party research and trade execution alongside the options already available, such as payment from an asset manager’s own resources or from a dedicated account.
The requirements for firms using this new option would include establishing:
- a formal policy on the use of the approach, including with respect to governance, decision making and controls; a budget for the amount of third-party research to be purchased
- ongoing assessments of research value and price
- an approach to the allocation of costs across their clients
- a structure for the allocation of payments across research providers
- operational procedures for the administration of accounts to purchase research
- disclosures to clients on the firm’s approach to bundled payments, their most significant research providers, and costs incurred.
The new plans are also compatible with rules governing research payments in certain other major jurisdictions, making it easier for asset managers to buy research in the same way across borders.
Next steps
Deadline for feedback: The deadline for comments is 5 June 2024. The FCA aims to publish a policy statement in the first half of 2024.
Subsequent consultation: The consultation proposes changes to the list of minor non-monetary benefits in COBS 2.3A and the addition of the payment optionality in COBS 2.3B. To ensure consistency across all the rules on research and inducements for investment firms and collective portfolio managers, the FCA plans to consult on rule changes in COBS 18 in the course of 2024.
Measure of success: The success of the new policy will be measured by the take-up of the new option. The FCA has not yet set out the key indicators it will use to monitor the new option but will publish those as part of the policy statement.
Click here to read the full RegInsight.
ESMA issues TVR report on cryptoassets market structure
The European Securities and Markets Authority (ESMA) has issued a report on Trends, Risks and Vulnerabilities (TVR), providing a detailed overview of patterns in cryptoasset secondary markets.
The report aims to improve understanding of cryptoasset trading and the extent to which it resembles or differs from traditional financial markets. It also identifies current and potential risk areas for consumers, market order, and financial stability. Finally, the analysis informs and supports the implementation of the EU Markets in Crypto-Assets (MiCA) regulation.
The findings and indicators outlined in the report will contribute to ESMA's ongoing efforts in that space.
Click here to read the full RegInsight.
Hong Kong regulators invite firms to adopt anti-scam charter
The Hong Kong Monetary Authority (HKMA), the Insurance Authority (IA), the Mandatory Provident Fund Schemes Authority (MPFA), and the Securities and Futures Commission (SFC) have jointly issued a Circular to encourage their regulated entities that primarily serve retail customers to adopt the Anti-Scam Consumer Protection Charter 2.0 (Charter 2.0).
Some context
The Charter 2.0 is a collaboration between financial institutions and merchant institutions to protect the public from credit card scams and other digital frauds, specifically phishing messages claiming to be from financial and merchant institutions. The main objective is to empower the public to avoid falling victim to these scams.
Key takeaways
The circular is part of an initiative to expand Charter 2.0's coverage by increasing the number of participating institutions.
The expectation for participants is to undertake specific activities, such as committing not to send instant electronic messages to customers with embedded hyperlinks for obtaining bank or personal information online or providing relevant training to frontline staff so that they can effectively handle customer inquiries and deliver anti-scam education messages as needed.
Next steps
Potential participants are requested to express their interest by 28 June 2024.
Click here to read the full RegInsight.
Michelle Bowman on bank liquidity
Michelle Bowman, a member of the Board of Governors of the Federal Reserve System, spoke at the Roundtable on the Lender of Last Resort in Washington DC, focusing on the Federal Reserve's crucial role in providing liquidity to the US banking system.
Bowman's address delved into the historical context of the Federal Reserve's authority, post-2008 regulatory changes, challenges in liquidity provision, optimising the lender of last resort function, addressing stigma, reflections on the Bank Term Funding Program (BTFP), and closing thoughts on the future direction of liquidity regulation.
Historical context and evolution of Federal Reserve Authority
Bowman outlined the historical mandate of the Federal Reserve, established in 1913 to address cyclical financial panics and economic turmoil. She emphasised the Fed's authority to create an elastic money supply to meet liquidity demands during times of stress. The speech highlighted the evolution of the Fed's authority, including the establishment of the discount window and emergency lending facilities post-2008 financial crisis.
Post-2008 regulatory changes
Bowman discussed regulatory changes enacted after the 2008 crisis, aimed at strengthening the banking system's resilience. Bowman stressed the significance of increased capital requirements, stress testing, and resolution mechanisms mandated by the Dodd-Frank Act. She highlighted the dual objective of reducing the probability of large bank failures while improving the resolution process to mitigate systemic disruptions.
Challenges in providing liquidity
Bowman identified key challenges in providing liquidity, including optimising the effectiveness of the discount window and addressing the stigma that can be associated with borrowing. She discussed the implications of requiring pre-positioning of collateral and the need to enhance operational readiness to ensure prompt access to liquidity during crises. The speech also noted the importance of understanding and mitigating technology and operational issues that may hinder the discount window's effectiveness.
Optimising the lender of last resort function
Bowman advocated for optimising the operation of the discount window and enhancing technological readiness to meet industry liquidity needs effectively. She emphasised too the importance of evaluating the need for pre-positioning collateral at the discount window and its potential impact on banks' liquidity management and operational risk.
Addressing stigma and broad-based approach to liquidity
The speech considered the challenge of stigma associated with discount window borrowing and proposed mitigating strategies. Bowman called for a broad-based review of liquidity resources and regulations to ensure a complementary framework. She underscored the need to consider the interrelationships among various liquidity resources and liquidity planning to enhance the resilience of the financial system.
Bank Term Funding Program (BFTP)
Bowman reflected on flaws in the design of the BTFP, emphasising the importance of learning from past experiences to improve future emergency lending programs. She highlighted the need for a targeted approach to supervision and continuous improvement of liquidity regulations.
In concluding, Bowman stressed the importance of a comprehensive approach to liquidity regulation to ensure the resilience of the banking system and financial stability. She called for ongoing efforts to enhance the effectiveness of emergency lending tools and to address challenges in providing liquidity to the banking sector.
Click here to read the full RegInsight