How MiFID II is changing the City landscape: we hear from the FCA

It is hardly surprising that there were so many keen attendees from across the City at Substantive Research’s fourth Unbundling Uncovered conference held earlier this week. The implementation of MiFID II on 3 January this year has, after all, caused transformative changes to how the financial services industry functions.

The day brought together experts from across the industry to discuss how the consumption, pricing and dissemination of investment research has changed over the past ten months and what further developments can be expected in the medium- to long-term. A series of panels were held on subjects such as the differences between regulatory frameworks, especially the US and Europe and how these impact the research production and asset management industries respectively; the need for asset managers to strike a balance between research costs and good investment processes and the subsequent role that external research will continue to play in the investment process; the issue of pricing research and the practical implementation of different pricing structures; and finally, the role that technology will play in addressing these challenges.

The day opened with a keynote speech from Mhairi Jackson, FCA Manager of Wholesale Conduct and Markets Policy, in which she described MiFID II as an opportunity to engender a more dynamic, progressive and fairer market environment in the financial services sector. Since the FCA’s first investigation into research unbundling in 2001, regulatory changes in this space have sought to remove conflicts of interest along the investment process and increase transparency and value for the end investor. Jackson described MiFID II as a significant step in the FCA’s continued focus on these objectives but it was also clear from her comments that it was still very early in the life of these new regulations to draw many firm conclusions.

The January regulations have not only increased transparency for investors but also created a regulatory environment which fosters high quality and accurately priced research and best-execution trading strategies. Jackson noted that industry changes such as the move towards menu pricing models and an increase in demand for bespoke research providers were both indications that the industry is shifting to focus on research quality and accurate pricing as central components to investment strategies. Jackson finished by saying that the FCA would continue its review into the implementation of MiFID II, carrying out in-house visits and further analysis over Q1 2019, before releasing a report in Q2 2019. Specific challenges to MiFID II compliance such as accurate research pricing and inducement monitoring would be fully addressed in this report. She ended her comments saying that she did “see promise.” We continue to observe the FCA’s thoughts carefully and look forward to another update early next year.

Later in the day, founder Lucas Wurfbain spoke on a panel along with other fintech industry leaders from BlueMatrix, Smartkarma, Kite Edge and ERIC among others on how technology can address compliance issues. The panelists offered a broad range of views on varying aspects of the industry but were unanimous on one point: MiFID II has acted as a catalyst for firms to look at technology not only to solve near-term compliance requirements, but also to consider how data-based solutions can form the foundation of longer-term business strategies going forward.

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