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09 January 2015

Blog: A revolution in the EU financial system on 3 January 2017? Unbundling execution costs from research

ESMA's Technical Advice to the European Commission on improving investor protection as part of MiFID II could have profound implications.

ESMA gave the capital markets a nice Christmas present of 1615 pages of light reading. The publication limbered up with 446 pages of Technical Advice to the European Commission on improving investor protection. Then came the two-part consultation on draft regulatory technical standards and implementing technical standards. The aim is to see MiFID II and MiFIR go operational on 3 January 2017 – precipitating a revolution.

The Commission will use the Technical Advice draft it to prepare its own delegated legislation. There is the potential for the Commission to reject the compromises agreed by the officials who meet “independently” in the European Supervisory Authorities – ESMA in this case. Moreover, the Commission is not formally obliged to consult on its eventual proposal but the significance is such that it would be very surprising if it did not. However, ESMA is quite clear that its draft Technical Advice is “fully compliant with MiFID II”, thus reducing any scope for challenge by the co-legislators - especially Parliament.

The revolution could even start this year. The Investment Association (IMA) – with 200 UK members who control £5tn of investments (three times the UK’s GDP) – has already said that it " supports the proposed requirement for brokers to offer to price execution and research separately, in order to help investment managers meet their obligations… A key part of the advice proposes the mandatory use of a commission sharing agreement (CSA) between asset managers and investment banks. The IMA will now develop an enhanced model CSA in association with an international law firm. We expect to make this enhanced model CSA freely available throughout the EU in the first quarter of 2015.”

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