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    MiFID II research checks

    The all-important MiFID II research checks start with the establishment of research payment accounts with the agreement of clients. If such accounts are required for existing or new clients, take a look at the following checklist to see whether you have the major points covered.

    MiFID II Research Checks:

    1. What will the budget look like? Ultimately, the amount and type of research ordered by the firm will depend on how much budget is available, as agreed with the client. So, what does this look like?
    2. What’s the overall research strategy? Have you agreed with the client where the focus of the research shall be? Ultimately, the aim of investment research is to help fund managers obtain the best returns from their investment strategy – so what sectors do you and the client agree should have the most focus? Are there particular asset classes to home in on? Territories? Currencies? All questions that need answering if the budget is to be spent wisely.
    3. Which brokers and research houses will you use? The unbundling of research costs mean these are more transparent than before; something which is expected to drive competitive behaviour in the research market. So, which research providers will you use? Who has the best track record? How effectively will you be able to negotiate your costs? Also, will there be any providers of free research MiFID II research checksthat you can take advantage of?
    4. Do you need to draft new investment management agreements with clients to reflect the separation of research and execution? Existing IMAs will need to be checked to see whether this point is adequately covered for the MiFID II world.
    5. Do you have the necessary agreements for holding the funds? Are your accounts segregated? Can you report on transactions to clients effectively? If not, your procedures may require revisiting.
    6. Do you have the right third party agreements? If you have third parties operating the research payment account on your behalf, have you provided them with all the necessary procedures that they need? Will you have sufficient reporting and MI? Are your governance and monitoring arrangements suitably robust?

    For larger investment firms operating pooled funds with significant scale, the challenge will be to make sure that all investing clients understand the extent of the research budget, and what proportion of it will effectively be charged to their account.

    And on top of all this, there are the regulatory requirements.

    • Methodology - For investment firms authorised and regulated in the UK, the FCA will first of all, expect them to demonstrate what is referred to as a “clear methodology” for setting client expectations for what research they will pay for.  Do you have such a methodology agreed?
    • Managing research quality – Do you have a process to monitor the quality of the research you receive, and therefore, the future relationships with research providers? This is something the FCA will also want to see. Also, bear in mind that any trial periods for providers must be time-limited.
    • Have you obtained the necessary FCA approval? This could take up to a month from the date of application to receive, which means that initially, research costs may have to be borne directly by your business.

    Going down this checklist, how many of these points could you say are already covered? If most or all of them are, then you're ready for this aspect of MiFID II's implementation, but if not, then you need to check if the gaps aren't just in terms of procedures but knowledge as well.

    The changes being introduced by MiFID II are wide-ranging, highly technical and will require changes to working practices by a significant number of staff. They'll need to understand these changes, and will need to be effectively trained.

    Want to know more about FCA Compliance?

    As well as 30+ free compliance training aids, we regularly publish informative FCA compliance blogs. And, if you're looking for a training solution, why not visit our FCA compliance course library.

    If you've any further questions or concerns about FCA compliance, just leave us a comment below this blog. We are happy to help!

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