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HMRC internal manual

Stamp Taxes on Shares Manual

Financial markets: background: Markets in Financial Instruments Directive II (MiFID II)

MiFID II (Directive 2014/65/EU) originates from the European Commission and seeks to provide a European-wide legislative framework for regulating the operation of financial markets in the EU. The aim of MiFID II is to improve investor protection and the efficiency and resilience of financial markets. Its remit in this respect extends to the introduction of robust controls to avoid conflicts of interest, to encourage greater transparency both pre and post- execution and to restrict commissions payable in respect of investment advice and portfolio management.

MiFID II came into effect on 3rd January 2018.

Unbundling of Research

MiFID II seeks to unbundle the supply of research from execution services. Under the Directive, investment firms providing both execution and research services are requires to price and supply then separately.

Recital 28 of the MiFID II delegated directive (Delegated Directive (EU) 2017/593) defines “research”. In essence, research is:

  1. Undertaking work which leads to the recommendation of an investment strategy which shares to buy or sell, or:
  2. Undertaking work which leads to conclusions being reached which can allow others to make such recommendations.

To ensure the bundling together of investment research and execution services does not occur, Article 13 of the MiFID II delegated directive sets down two methods to pay for investment research:

  1. The P&L method where investment firms fund the research themselves from their own resource.
  2. The Research Payment Account (RPA) method where the costs of research are funded by the client.

Charges to fund the RPA collected alongside a transaction commission must be separately identifiable and not linked to the volume and/or value of transactions.

Dealing Capacity Changes

MiFID II also introduces three new trading/dealing capacities for the purposes of transaction reporting. STSM133030 provides further information on this.