On Monday 28 October 2024, the European Securities and Markets Authority (ESMA) published a consultation paper on amendments to Article 13 of the MiFID II Delegated Directive, in light of changes being introduced by the Listing Act Directive to enable joint payments for execution services and research.

ESMA has been requested to provide technical advice to the European Commission on the implementation of the amendments to MiFID II (and the Prospectus Regulation and Market Abuse Regulation) in the context of the Listing Act Directive. The Listing Act legislative package was adopted by the Council of the EU on 8 October 2024 and is due to be published shortly in the Official Journal of the EU.

ESMA is consulting on which of the below approaches to take to changes to the Delegated Directive:

1. Make no changes as no changes were made in the context of the ‘MiFID Quick Fix’ which introduced rules allowing firms to bundle payments for research and execution in relation to small and mid-cap issuers whose market capitalisation did not exceed EUR 1billlion. [ESMA opts against this approach stating that it would lead to an unclear regime and investor detriment]

2. Introduce detailed requirements for the three payment options such as what should be included in the remuneration methodology and how firms should inform their clients*.

(*)          The Listing Act Directive requires firms to establish a methodology for remuneration, including how the total cost of research is generally taken into account when establishing the total charges for investment services.

[ESMA opts against this approach as the Listing Act Directive amendments are high-level and introducing detailed requirements might interfere with the objectives for the changes]

3. Introduce high-level requirements which better align the Delegated Directive with the three payment options (to be) offered in the Level 1 text and strike a balance between the revitalisation of the market for investment research, the existing framework for inducements and the proper management of conflicts of interests.

[ESMA chooses this approach, proposing a requirement on firms (i) to include a comparison with potential alternative research providers as part of their annual assessment of research used, where feasible**; and (ii) where a firm pays jointly, to enter an agreement for joint payments when the methodology for the remuneration prevents that the firm would pay substantially more for the research component than the costs of research when the firm would have paid directly for it and when it does not impede the firm's ability to comply with best execution requirements***.]

(**)        Per the Listing Act Directive, the requirement for an annual assessment of research used will be applicable to research in general, not just when firms use a research payment account (RPA). ESMA notes that it is unclear how such assessment is currently made by firms using an RPA and whether it is made in a thorough manner. ESMA’s proposal seeks to ensure that firms at least compare alternative offers available on the market and to prevent over-reliance on a current research provider.

(***)     While ESMA proposes to grant firms flexibility as to the remuneration methodology they choose, it proposes to further specify the requirement and how the firm should consider its best execution obligations when considering using joint payments. ESMA states that this would ensure that choosing a joint payment method does not lead to investor detriment in that clients would be paying more for research than they would if the firm chooses a different payment method (if, ultimately, they bear the costs).

The consultation closes on 28 January 2025. ESMA aims to provide its technical advice to the European Commission in Q2 2025.

If you have any questions on the consultation, please contact Aniqah Rao.