Payments for Research: AMF Task Force fires an early shot in the MiFID II Review Process

• AMF (French Regulator) Task Force has reported into effects of MiFID II on research industry
• Identified major concerns especially on coverage of small and medium size companies
• Task Force has made recommendations to strengthen industry including issuer-sponsored research
• Suggests it is likely there will be substantial changes to MiFID II following review later in 2020

A task force originally set up in July 2019 by the Autorité des Marchés Financiérs (AMF), the French Financial Services Regulator and reporting in February 2020 has voiced some serious concerns about the impact that the Directive has had on the investment research industry, particularly research production capacity and especially for coverage small and mid-cap companies.

The AMF Task Force's Report, entitled "Reviving Research in the Wake of MiFID II" represents an important statement of intent on behalf of the French Regulator, one of the more influential European regulators.

Work on the review of MiFID II is already underway. The European Commission issued a consultation on 17 February that include a number of questions on how the quality of and access to research on small and medium sized companies could be improved. The Task Force's Report is a strong indication that the review will lead to meaningful changes to the current Directive.

Problems Identified

• Declining Coverage of small and mid-cap stocks has been exacerbated by MiFID II.
• Market sentiment on the Research Reforms is overwhelmingly negative and prospects for the future are pessimistic.
• The market is finding alternatives to traditional research provision.
• There are considerable concerns about the quality of research
• Trial periods have had an adverse effect
• Firms using "P and L" have created a new constriction to consumption - their Finance Department
• Pricing is still unclear.

Proposed industry changes

• Introduce "adequation" between research price and production cost.
• Create a temporary "virtual research marketplace" to increase SME research supply.
• Public finance should support research production for innovative companies.
• Encourage new forms of research for example ESG research.
• Support development of issuer-sponsored research.
• Consider investment in SMEs as equivalent to "Socially Responsible Investment".

Proposed MiFID II changes

• Extend the "Reasonable Commercial Basis" for market data, to research.
• Consider concierge services as a minor non-monetary benefit.
• Ease trial period restrictions.
• Consider adding "proportionality" to research funding rules.
• Simplify RPA administration for smaller asset managers.
• Exempt Independent Research Providers from MiFID II.
• ESMA review into whether research should be included in the inducements system.

We will keep clients informed as we move through the MiFID II consultation process and towards proposals for legislative changes later this year.

The full version of this Briefing is available HERE