MiFID II update

FCA policy statement covering changes to research unbundling and best execution reporting completes UK MiFID II quick fix

On 30 November the FCA published PS21/20: Changes to UK MiFID’s conduct and organisational requirements, confirming the changes the FCA will make to UK MiFID II research and best execution reporting requirements. This policy statement follows CP21/29 published in April.

We set out below more detail regarding the changes, but in summary:

  • As anticipated, from 1 December 2021 firms will no longer be required to prepare UK RTS 27 and RTS 28 reports.
  • From 1 March 2022, it will be possible to exempt the following from the FCA’s inducement rules on research:
  1. research on SMEs below a market capitalisation of £200m, and corporate access services in respect of the same,
  2. fixed income, currency or commodity instruments (FICC) research received by a firm providing investment services or ancillary services to clients – regardless of whether this is received in connection with a FICC strategy or not (as was initially proposed),
  3. research provided by research providers who do not provide execution services and are not part of a group that includes a firm offering execution services, and
  4. openly available research – and research can be viewed as openly available even if the provider has imposed access restrictions to comply with regulatory requirements.
  5. As noted above, this exemption does not have immediate effect and only becomes applicable from 1 March 2022, but this is likely not going to be a supervisory priority for the FCA in the interim period.

Please do get in touch if it would be helpful to discuss.

More detail on the changes

The policy statement confirms the following changes.


  • From 1 March 2022, the following can be treated as minor non-monetary benefits (MNMBs) for the purposes of the FCA’s inducements rules relating to research:
    • research on listed or unlisted companies who have a market capitalisation below £200m provided it is offered on a bundled basis or provided for free. - In a change from CP21/29, and in an effort to reduce churn of qualifying companies and ensure operational simplicity, the market cap is to be calculated with reference to the average closing price of the shares of the company at the end of each month to 31 October for the preceding 24 months (rather than being calculated with reference to the end-of-year quotes for the 36 calendar months preceding the provision of research, as had been proposed in the consultation). Specific provisions are also included for companies newly admitted to trading.
    • corporate access services which relate to listed or unlisted companies with a market capitalisation below £200m (calculated as above). – This is a new change not contemplated in CP21/29. Although it is helpful for the FCA to put beyond doubt that corporate access relating to relevant SMEs constitutes a MNMB, it is also a reminder that firms should consider carefully their approach to receiving corporate access more broadly under the inducement rules. 
    • third party research that is received by a firm providing investment services or ancillary services to clients where it relates to FICC. - In a change from CP21/29, the FICC exemption no longer requires the recipient firm to be using the research for an investment strategy primarily relating to FICC, but rather that the research itself must relate to FICC. The policy statement also notes that the FCA view it as acceptable for the recipient firm to rely on representations from research providers that they are supplying FICC research (although this statement is not reflected in the rules). Although this will likely be operationally easier for firms and expands the scope of buy side firms able to benefit from the MNMB treatment, it arguably also narrows the scope of the research which can be treated as an MNMB under this exemption and potentially introduces complexities in determining whether research reports “relate to” FICC instruments and therefore can be treated as an MNMB, for example where the research touches on non-FICC asset classes to any extent. See also the comment on macro-economic research below. 
    • research received from a research provider where the research provider is not engaged in execution services and is not part of a financial services group that includes an investment firm that offers execution or brokerage services. - In a slight change from CP21/29, the exemption no longer refers to an “independent” research provider, to avoid the suggestion that investment research provided by firms that do not fall within this exclusion could not be independent; and
    • written material that is made openly available from a third party to any firm wishing to receive it or to the general public. “Openly available” in this context means that there are no conditions or barriers to accessing the written material other than those which are necessary to comply with relevant regulatory obligations, for example by requiring a log-in, sign-up or submission of user information in order to access that material. - In a welcome change from CP21/29, the FCA have clarified that materials will still be considered “openly available” even if subject to conditions on access, provided such conditions are necessary to comply with relevant regulatory obligations. In order to demonstrate that any such conditions are “necessary”, the FCA suggests that firms will need to be able to show that any access restrictions are proportionate, and how they have otherwise sought to ensure that access is as frictionless as possible (although this commentary has not been reflected in the Handbook text). 
  • Overall we expect that these changes are more helpful by comparison to those in the EU MiFID Quick Fix (in particular because there is no requirement for a value to be ascribed to the “free” research, unlike under the EU reforms), and so will be welcomed by the market.
  • Also of interest is the FCA’s response to certain proposals received following CP21/29 that it has rejected, notably:
    • keeping the market capitalisation for the SME exemptions at £200m, despite requests to raise it and / or align it with the EUR 1bn threshold under the EU MiFID Quick Fix – the FCA consider the £200m threshold to be set at the right level, and that the aligning the threshold with the EU’s would reintroduce material bundling of fees and unacceptably high inducement risk in the UK market;
    • rejecting the suggestion that the FICC exemption should be extended to include macro-economic research, on the basis that this may often explicitly or implicitly suggest an investment strategy and be a chargeable service for some major firms, as well as include elements of other types of research (e.g. equities); and
    • the implications of the exemptions on the application of the SEC no-action letters for research where research benefiting from the MNMB treatment continues to be specifically paid for. The FCA notes it is not appropriate for them to comment on the application of the SEC no-action letters, but firms may wish to consider this further, as well as the implications of the MNMB treatment on any existing related contractual arrangements.
  • We note that in making the above amendments, the FCA has not amended the specific unbundling requirements in COBS 2.3C to reflect the new MNMB provisions which allow for re-bundling. Similarly, the FCA did not take the opportunity to make consequential amendments to the Handbook text to complement some of the changes made to the UK MiFID II Delegated Regulation by the “UK Quick Fix SI” in June (e.g. to reflect changes to the requirement to provide trade confirmations). Firms will need to consider the interaction of the different provisions carefully.

Best execution reporting:

  • From 1 December 2021, UK RTS 27 and 28 best execution reporting obligations will be removed (noting that the FCA has already stated this year that they would not take action against firms who do not produce RTS 27 reports during 2021). This will be a very welcome development – especially since RTS 28 reports were not disapplied under the EU’s MiFID Quick Fix or the recent Commission legislative proposals to change MiFID II following the EU MiFID II Review.
  • Several related changes were made to the UK MiFID II Delegated Regulation through the “UK Quick Fix SI” in June, and these (like the FCA Handbook changes) take effect on 1 December. These include the removal of RTS 27 and 28 reporting obligations for trading venues and the removal of RTS 28 reports in relation to the services of reception and transmission of orders and portfolio management.
  • Firms will need to consider whether any of their existing disclosures or client facing materials (e.g., terms, websites, best execution policies) which reference RTS 27 or 28 best execution reports need to be amended to reflect that firms will no longer produce these.
  • It is worth noting that one response to the FCA’s consultation advocated against  a removal of RTS 27/28, which prompted the FCA to state that it will keep the removal of RTS 27 and 28 requirements under review “as part of the Wholesale Markets Review including on market data”.

Documents and further reading

FCA Policy Statement 21/20 can be accessed here, and the related FCA press release / webpage is here.

Our client note on the UK’s MiFID II quick fix SI, published in June 2021, is here

Our client notes on the EU MiFID II quick fix are here and (on the changes to the commodity derivatives regime) here

Our client note on HM Treasury’s consultation on the Wholesale Markets Review is here, and our webinar on the proposals can be accessed here

Our client note on the European Commission’s recent legislative proposals for changes to EU MiFIR and MiFID II, following the EU MiFID II Review, is here