EU: ESMA consultation on payments for investment research

Why should I read this?

On 28 October, ESMA launched its “Consultation on the technical Advice to the European Commission on the amendments to the research provisions in the MiFID II Delegated Directive”.  Following changes introduced by the Listing Act that permit the ending of the ban on bundling of payments for execution services and research, the consultation seeks feedback on proposed amendments to the research provisions of the MiFID II Delegated Directive.   While the bundling ban has previously been eased for certain small cap and start-up issuers, the Listing Act permits the end of the ban on bundling of payments for execution and research services for all issuers, irrespective of their market capitalisation.  Currently there are exceptions to the ban for issuers with a market capitalisation of less than EUR 1 bn.

Why was bundling of payments for execution and investment research banned?

The EU’s ban on the bundling of payments for execution and investment research was introduced in January 2018 by reforms to MiFID II.  The changes were originally made to address concerns that bundling led to conflicts of interest that might sway the fairness and accuracy of the research and treated bundled investment research as an inducement.  Non-EU markets did not seek to ban the bundling of execution and investment research payments.  The unintended but foreseeable consequence was that the amount of investment research in respect of EU issuers declined and with it, the ability of investors to make more fully informed choices about investments into EU issuers, which in turn was considered to have reduced the flow of funding to such companies.

Following Brexit, the UK took steps to end the ban on payments for research while introducing safeguards against conflicts of interest when execution and investment research are in exchange for a single payment, which came into force in July 2024.  See our previous client briefing:

• UK: FCA Policy Statement PS24/9 Payment Optionality for Investment Research

The UK reforms preserved the option for market participants to buy execution and investment research on an unbundled basis.

The approach in the consultation

ESMA’s proposed approach is to amend the directive (level 2 legislation) to better align it with the new options offered in the Listing Act (level 1 legislation).  If the proposals are adopted, a single payment for execution and investment research services will be possible, subject to safeguards to regulate inducements and manage conflicts of interest, while market participants will still be able to pay separately for execution and investment research services.

The proposed safeguards include:

• an annual assessment of the research used, comparing the quality, usability and value of the research with that of other providers, if possible
• structuring of remuneration for research in a way which prevents a firm from paying substantially more than it would do if it were paying separately, which might be achieved by tiered and declining research related fees or a research fee cap

Investment firms providing execution and investment research services to clients will remain subject to the usual MiFID II obligations to act honestly, fairly and professionally and in the best interests of their clients.

The proposals that ESMA is consulting on appear to have been modelled on the UK reforms.

Next steps

The closing date for feedback is 28 January 2025.  Responses should be submitted online on the ESMA webpage “Consultation on the technical Advice to the European Commission on the amendments to the research provisions in the MiFID II Delegated Directive”.

ESMA will provide its technical advice to the Commission on later than 30 April 2025. 

How Eversheds Sutherland can help

Our team have been advising on regulatory interpretation and product development for the fund management industry since the 1980s and we have been at the forefront of new products under European and UK regulation since then.  In addition, our team has an extensive expertise on matters related to MiFID II legislation and regularly provides assistance  to various banks, investment firms and UCITS management companies.  Our in-depth understanding of the sector and experience with the practical implementation of new product categories means that we are very well placed to guide you in complying with the changing product and regulatory environment.