FCA Consult on Changes to Investment Research and Best Execution Reporting | Bryan Cave Leighton Paisner


On April 28, 2021, the Financial Conduct Authority (FCA) published a consultation document (CP 21/9) on proposed changes to its investment research rules and best execution reporting requirements. We discuss these proposed changes, their background, and EU / MiFID II counterparts in this alert.

Context: a new British legislative framework after Brexit

The FCA consultation is part of the capital markets review it is conducting alongside HM Treasury in light of Brexit and the resulting ability to deviate from EU rules. This review will focus on what FCA describes as ‘priority areas’, many of which stem from the MiFID II requirements embedded in the UK. These priority areas include: market structures, pre and post trade transparency for stocks, bonds and derivatives; the cost and distribution of market data; and commodity derivatives markets.

The first part of the review concerns the changes proposed by the FCA to the investment research and best execution reporting rules.

The MiFID II position

The investment research rules which are set out in MiFID II and which were essentially the result of the FCA, have been the subject of much debate and consternation in the sector. MiFID II required that research be “decoupled” from transaction costs. Companies that received research were required to either pay for the research themselves or pass the cost on to customers as a separate fee, in order to ensure better price transparency for customers. FCA’s market review, undertaken after the launch of MiFID II, found that companies are now absorbing costs rather than passing them on to customers. However, concerns about the impact on research coverage and quality led FCA to propose the relatively limited changes described below.

In addition, the FCA has found that the reporting requirements related to best execution which were introduced by RTS 27 and 28 in MiFID II, are not useful for market participants or investors when it comes to ” evaluate the best quality of execution. Consequently, CAF proposes to delete obligations RTS 27 and 28.

Changes proposed by the FCA

At EU level, changes to investment research and best execution reporting rules have recently been implemented through the so-called MiFID “Quick Fix”. The FCA has spoken to players in the UK market and considered issues similar to those addressed by the “Quick Fix”. The table below provides a summary comparison of the “Quick Fix” changes versus the changes FCA is currently proposing as part of this consultation document (PC 21/9):

FCA changes

Changes to the EU’s ‘quick fix’

Research on SMEs below a market capitalization of £ 200m (for 36 months prior to research) exempt from incentive / investment research rules

Research on SMEs below a market capitalization of 1 billion euros (for the 36 months preceding the research) exempt from the search incentive / investment rules

Research on fixed income securities, currencies and commodities exempt from the rules for research on incentives and investments

No equivalent

Research provided by independent research firms (not engaged in execution services or part of a group that offers execution or brokerage services) exempt from incentive / investment research rules

No equivalent

Research made openly available (e.g. not requiring login, registration or submission of user information) exempt from incentive / investment research rules

No equivalent

Removal of the obligation for execution venues to report RTS 27 (quarterly execution quality metrics)

Obligation to suspend RTS 27 reports for two years from the end of February 2021

Removal of the obligation for companies executing and transmitting client orders to make RTS 28 reports (annual report listing the five main execution venues to which they have sent client orders in previous years, and a summary of the results of execution achieved)

No equivalent

While it is not surprising that the FCA has chosen to shy away from the EU’s proposals and tailor the changes to the needs of the UK market, this represents further regulatory fragmentation for companies operating in UK jurisdictions. UK and EU. It remains to be seen how many companies will take advantage of FCA exemptions or whether they will find it administratively easier (and less expensive) to maintain an approach in both the EU and the UK.

The consultation ends on June 23, 2021.

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