Markets in Financial Instruments Directive (MiFID) II research unbundling, inducements and best execution have come under some sharp criticism from City trade associations. Evidence of inefficiencies and calls for change are prominent among mixed responses just published to European Commission’s consultation on the Markets in Financial Instruments Directive/Regulation (MiFID/MiFIR) Framework.

Unbundling under MiFID II, by which research is priced separately from execution, has meant that firms are focusing more sharply on the overall quality of research used by investment managers and analysts, said the Personal Investment Management and Financial Advice Association (PIMFA), whose membership includes wealth managers.

Firms have started processes to check unsolicited research, and have established panels and committees to rate paid-for research for usefulness and value-for-money, PIMFA said in response to the Commission’s consultation, which closed on May 18, 2020.

"However, this has come at a cost – the processes and systems required for sifting, categorising, blocking and evaluating different types of incoming research are extremely labour-intensive, adding yet further to the costs that firms are now incurring for paid-for research," it said.

In the UK, MiFID II inducement provisions were implemented to accommodate Retail Distribution Review obligations, and so firms are subject to more stringent inducements requirements than their EU counterparts, PIMFA said. Firms providing portfolio management or advice to UK based retail clients cannot retain for themselves benefits provided by third parties, it said.

"We believe that consumers across the EU would benefit from the MiFID II provisions in relation to inducements being 'levelled up' so as to become equivalent to those in force in the UK," PIMFA said in its response.

Best execution

On best execution disclosures, firms see data published as mostly of use to professional investors and competitors, PIMFA said. "Retail investors seldom use them (those who do tend to be execution-only investors) and generally don’t understand them."

The best execution regime is not functioning optimally for end investors, the Association for Financial Markets in Europe (AFME) said in its response to the same consultation.

"End investors do not in the main find the current reports useful due to the over engineered nature of the requirements and the quantity of unhelpful data contained therein, and the fact that, in certain circumstances, the reports require the inclusion of information which is useless for end clients," AFME said in its response.

Intense effort is required to compile each report, but the reports are too complicated and have an overload of information that is difficult to interpret, it said.

AFME members find the reports are framed in the context of electronic trading, making it difficult to apply the requirements to voice or other trading scenarios (such as certain OTC trading activity), it said. In addition, members say that better pricing information is often available to clients through existing market data channels.

AFME supports either removing the requirement to produce best execution reports or significantly simplifying reporting requirements to ensure end users' needs are addressed while reducing operational impact on firms, it said. Any changes to this regime other than to remove or significantly simplify the reporting requirements are likely to impose additional implementation costs on firms.

Telephone taping

PIMFA does not believe that telephone taping requirements are the most effective means of guarding against the mis-selling of investments, it said.

Searching for, retrieving and listening to calls is labour-intensive and, while some firms may undertake random checks his way, most will only access telephone records to address specific issues or to monitor against specific risks, for example if a firm deals on its own account or provides corporate finance services to an issuer, PIMFA said. 

All personal recommendations in relation to MiFID financial instruments are now subject to a requirement for a suitability report outlining the advice given to the client and how it meets the client's preferences, it said. These reports give clients the opportunity to query the advice provided, it said.

AFME members support a harmonised approach to telephone taping and record-keeping generally across member states, AFME said.

Many member states already had local regulation requiring telephone taping before MiFID II, and unless there was a commitment that all member states will also wind back their local laws on voice recording, winding back the MiFID II rule would not mean no taping and would be very complex to implement, AFME said.