Time is running out for those investment firms wishing to pass on the costs of investment research to UK authorised funds (including UCITS, NURS, QIS) when the Second Markets in Financial Instruments Directive (MiFID II) comes into force on 3 January 2018. Karagh Gilliatt and Aidan Campbell, partners at CMS Cameron McKenna Nabarro Olswang LLP, discuss an approach that investment firms could take on research costs prior to 30 September 2017.
How can investment firms pay for investment research?
Article 13 of Commission Delegated Directive (EU) 2017/593 (Delegated Directive) supplementing MiFID II (2014/65/EU) of 7 April 2016 sets out potential exemptions to avoid the receipt of research being considered an unacceptable inducement. Under the Delegated Directive, it will be permissible to pay for research but only where the investment firm either pays this direct from its own resources (P&L) or from a separately created research payment account (RPA) which it controls. The RPA is funded by a specific charge to the client.
What are the practical implications of this?
If the costs of research are to be passed on to UK authorised funds through the mechanism of a RPA, fund prospectuses will need to be amended to introduce a new charge out of the scheme property. Ordinarily, under section 4.3 of the FCA’s Collective Investment Schemes sourcebook (COLL) the addition of any new charge would amount to a “fundamental change” and would therefore require shareholders to pass an extraordinary resolution before it could be introduced. However, the FCA has addressed this by adding Transitional Provision 47 (TP 47) to COLL. TP 47 states that for a prescribed period the introduction of a new charge to cover research costs would only be categorised as “significant”, meaning that the shareholders simply need to be given 60 days’ pre-event notice.
Is FCA approval required to introduce the charge to the fund’s prospectus?
Yes: in addition to the shareholders notice requirement, the FCA has confirmed to the CMS Funds Team that the FCA must approve the necessary amendments introducing the charge to the fund’s prospectus. Accordingly, FCA approval must be sought in line with the normal process, namely by submitting the relevant form, the revised documentation and the proposed notification to investors. The CMS Funds Team understand that the FCA has no current plans to introduce an expedited process to approve applications for the introduction of charges to cover research costs. Firms will therefore have to factor in the FCA’s statutory one-month approval period. Adding this statutory one month approval period to the 60 day pre-event notice, means that if investment firms wish to be able to charge research costs to the fund with effect from 3 January 2018 through the establishment of a RPA, their submission to the FCA will need to be made by the end of September 2017. It is therefore crucial that investment firms come to a decision on their chosen approach to research costs as a matter of urgency.
What if investment firms decide after 3 January 2018 to charge research to the fund?
Investment firms can take advantage of TP47 until 3 January 2020—but they won’t be able to charge the fund until they have been through the process outlined above (getting FCA approval, notifying shareholders and updating the prospectus).