On 30 November 2021, the Financial Conduct Authority (“FCA”) published Policy Statement PS 21/20, which sets out its changes to the research rules and best execution reporting in RTS 27 and RTS 28, in a move likely to be welcomed by market participants.


The action by the FCA seeks to remove unnecessary regulation and make MiFID II requirements “less complex”, following its Consultation Paper CP 21/9 in April 2021 (“Consultation”) which proposed the alterations. The reform intends to better tailor the regulations so that they are proportionate to the risks arising, to improve the availability of research on small and mid-cap listed or unlisted companies (“SMEs”), and to relieve trading venues and brokers from preparing and publishing best execution reports that don’t benefit users. The FCA changes sit within wider reform work by the FCA and the Treasury on capital markets.

FCA reforms: research exemptions

The new FCA rules remove certain categories of research services from the inducement rules in COBS 2.3A by treating them as “minor non-monetary benefits”. In other words, these can be provided “free of charge” or bundled with execution services without being considered an inducement.

The new inducement rules (“New Inducement Rules”) will operate to:

  • exempt research on SMEs that have a market capitalisation below £200 million from the inducement rules. This means that research on firms below this threshold could be provided by brokers to asset managers on a bundled basis (where asset managers make a single commission payment to brokers covering execution and research) or for free and without constituting an inducement under the rules;
  • exempt third party research on fixed income currencies and commodities (“FICC”) instruments from the inducement rules allowing it to be provided on a bundled basis that would not constitute an inducement under the rules;
  • exempt research providers from the inducement rules where they do not provide execution services and are not part of a group that includes a firm offering execution services; and
  • clarify that openly available written research (e.g., information found on a website) would not fall within the scope of the inducement rules.

However, the FCA has also clarified that macro-economic research may not be included in the FICC exemption and hence should still be treated as a research service that must be paid for. The FCA’s reasoning is that macro-economic research can explicitly or implicitly suggest an investment strategy. As macro-economic research comprises a very large part of research to support fixed income, currency and commodity strategies, disentangling these elements may be difficult in practice.

FCA reforms: end of best execution reporting

The RTS 27 and RTS 28 requirements have stopped with immediate effect. This reform removes:

  • the obligation on execution venues to publish a report on a variety of execution quality metrics to enable market participants to compare execution quality at different venues (known as RTS 27 reports); and
  • the obligation on investment firms to produce an annual report setting out the top five venues used for executing client orders and a summary of the execution outcomes achieved (known as RTS 28 reports). This obligation applied to firms engaged in the provision of portfolio management services, reception and transmission of orders, and execution of client orders.

The FCA seeks to remove reporting requirements where the cost for provision is not commensurate with the benefit from improved quality of execution resulting from the transparency. The FCA notes that feedback it has received indicates that there are very few users of such reports. Almost all respondents to its Consultation on the proposed changes favoured complete removal, corresponding with the market response observed across the EU in the lead up to and following implementation of MiFID II, which indicated that the top five broker reports required by RTS 28 were of limited use and, in some circumstances, may even be damaging to firms’ relationships with their brokers.

uk/eu regulatory divergence

The FCA appear to have placed little weight on maintaining equivalence with EU MiFID rules, a prime example being the FCA’s implementation of a £200 million market capitalisation threshold for SME research, compared to the EU’s €1 billion. In the FCA’s view, as supported by statistical analysis in the Consultation, the problems with research coverage are particularly apparent in this smaller population of companies. It is quite possible that this pattern of regulatory divergence will continue for the foreseeable future.

key dates and next steps

As of 1 March 2022, asset managers and research firms are able to act in accordance with the New Inducement Rules.

As of 1 December 2021, UK firms and execution venues are no longer required to prepare RTS 27 and RTS 28 reports. Hence, firms due to make the next set of RTS 27 and RTS 28 reports in April 2022 are no longer required to do so. Firms should consider whether any of their existing disclosures or client facing materials (e.g., terms, websites, best execution policies) which reference RTS 27 or RTS 28 best execution reports need to be amended to reflect that firms will no longer produce these.

For more information, and any guidance or advice on changes to FCA rules, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.

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