How New MiFID II research payment rules apply to sales and trading

One of the featured areas where MiFID II is scheduled to shine is on the issue of research payments charged by financial institutions. Traditionally the remit of large investment institutions, the new European directive is threatening to extend its regulations on research to all firms involved in financial sales or trading.

From the beginning of 2018, payments for financial research will have to be reimbursed directly rather than through the traditional pathway of being included in transaction commissions. The “old way” of doing business involved financial companies offering trading packages to their clients into which was bundled a whole range of research costs. However, if the Europeans mandarins have their way, even the slightest hint of advice, about whether a client should buy this share or that, or whether they should sell before or after the next “big figure” will also be considered as “research”, and will be considered worthy of a research fee.

This raises the thorny issue of who is qualified to give advice and who is not. Many investors enjoy talking “with the floor”, and value advice from those in the direct line of fire. From January 2018, the new rules will recommend, and enforce if they can, the policy that any financial advice must be considered as direct advice based on research.

As the old saying goes, advice “isn’t worth pinch of salt”, but MiFID II puts all of that on hold. Now, any advice, whether written, or spoken by phone or online must be paid for and considered as company investment advice. But the real question is how can such advice be monitored and controlled? While all calls are recorded, it is impractical to track down every single piece of information that traders and salespeople pass to their clients. It seems that MiFID II is making a straw for its own back.

Despite the obvious objections to this move, it does appear that financial firms are sitting up and taking notice. Nobody wants to obey rules, but in the end, we all inevitably do. So, in order to comply with the new regulations, financial firms are now embarking on programs to retrain staff and bring them into compliance with the European directive.

Future management and policing of the new rules on financial research will fall squarely on the shoulders of asset managers as they struggle to come to terms with all of the other rules recommended by MiFID and other European directives that affect the financial landscape. Inevitably, this will increase the pressure on trading and sales professionals whose roles have undergone significant changes since financial markets deregulated to increase market liquidity. The hope is that the latest initiative doesn’t affect that liquidity in a negative fashion which could herald in an era of financial uncertainty and doubt.