The U.K. Investment Research Review call for evidence was published on April 3, 2023. Relevant background to these issues is set out in our recent client note, “MiFID II: An Update on the Rules for Unbundling of Research,” in which we discussed the MiFID II requirements, the actions of the U.S. SEC, potential changes to the U.K. and EU MiFID II rules and the implications for broker-dealers that receive “hard dollars” for research. In summary, the research that investment managers typically receive from brokers is, under MiFID II, generally classified as a prohibited “inducement,” unless the investment manager pays for the research either: (a) directly from its own resources; (b) from a “Research Payment Account” (RPA) funded, with the client’s prior approval, with an advisory client’s money; or (c) a combination of the two methods. These requirements only apply directly to U.K.-regulated investment firms. However, brokers outside of the U.K. are affected by the legislation. Before the U.S. Securities and Exchange Commission granted exemptive relief, U.S. broker-dealers faced challenges because receiving MiFID II-compliant direct payments for research from U.K. investment managers would have amounted to accepting “hard dollar” payments, vitiating an important exclusion from being regulated as investment advisers.

The Investment Research Review will analyze the interplay between levels of research and the attractiveness of the U.K. as a listing venue, taking into account the effect of the U.K. MiFID II research unbundling rules on the amount and quality of research. MiFID II requires execution fees to be unbundled from research costs.  Following engagement with industry and assessing responses to the call for evidence, the Investment Research Review will make recommendations that could be for legislative and non-legislative changes, and may be addressed to the government, the regulators or industry. Responses to the call for evidence should be submitted by April 24, 2023.

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