On 4 April 2017, ESMA published updated Q&A on investor protection topics, including the operation of the rules on payments for research. By way of a brief summary of the new Q&A:

• Corporate access services – On the basis of recital 28 of the Delegated Directive, ESMA concludes that corporate access services do not appear to be research where there is no implicit or explicit recommendation or suggestions of an investment strategy or substantiated opinion regarding the current or future price/value of instruments/assets. However, the firms arranging corporate access need to make sure that pricing and charging for research is not subsidising the service. Accordingly, if considerable resources are applied to arranging exclusive meetings, it may amount to a ‘material benefit’ as opposed to being acceptable as a minor non-monetary benefit. Whereas, investor roadshows publicly open to analysts and investors may be capable of qualifying as a minor non-monetary benefit.
• Macro-economic analysis – ESMA has taken the view that it will depend on the nature and content of the analysis as to whether macro-economic analysis constitutes ‘research’, but that as a starting point, this type of analysis ‘is likely to, explicitly or implicitly, suggest an investment strategy… although some macro-economic material may be sufficiently general to fall outside the definition. Where not considered to be research, it will not automatically classify as a minor non-monetary benefit and firms will need to decide whether it is a material benefit and then pay or refuse. An exception would be where more generic information is made available to all firms wanting to receive it or published on a website, which is then likely to amount to a minor non-monetary benefit.
• Research related to FICC – ESMA has noted that firms will have the option to pay for research themselves, or use an RPA funded by a charge to the client. ESMA acknowledges that it may be possible to price this through a subscription agreement, however, firms would need to be able to demonstrate how the pricing structure has been developed. Alternatively, ESMA has suggested that providers have the option of making research available to all firms/the public, in which case it may amount to a minor non-monetary benefit.
• Ensuring budget allocations are in clients’ best interest – The Q&A provides guidance on how firms can demonstrate through their research policy how the quality of research is assessed and how research can contribute to better investment decisions. The policy should also set out how costs can be fairly allocated across client portfolios. The Q&A goes into detail on expectations in the approach to setting budgets (at Question 10, pages 50-51).
• Client disclosure – Before providing investment services, where using an RPA, the Q&A directs firms to provide clients with the amount that has been budgeted for research (in a monetary amount for the group of portfolios/strategies/funds benefiting from the research to which the client’s charge is contributing), and the estimated amount expected to be paid out of the assets of the individual client (presented as a single figure estimate, and disclosed in both a percentage (or basis points) and a cash amount. ESMA has confirmed that firms cannot provide a range of charges, but can provide a maximum figure that it guarantees will not be exceeded.

The full Q&A for this topic can be found at pages 46-52 of the document. If members have any questions, please contact Adam Jacobs-Dean, Oliver Robinson or Adele Rentsch.