♪ nejra: the final countdown with less than 100 days to go in the mifid 11. , we speakethod exclusively to andrew bailey, the head of the conduct authority about brexit and the future for asset management.

to bloomberg markets, rules and returns. to to dodd-frank, we speak to the manager's reacting to a new generation of rules. let's dive into the regulator y framework. i spoke to andrew bailey and asked him about the hot topic on .veryone's mind and >> everyone is doing everything they can to be involved. to be out and about, making sure everyone understands what is needed. are not finding cases as we

might expect of deliberate refusal to help so i am recently comfortable with where we are. there is a lot to be done as we .ight expect the rules come into effect in january. our supervision will take over of the markets in the firms. sure,e done work to make i expect to be taking, we will find things that are better than that are going less welcome firms will tell us about that. nejra: you have artie asked paperwork to be submitted by july 3. you say that many firms have met this deadline. how concerned are you about the ones that haven't? >> at the moment our overall view is we have had a good response following the publicity

we gave in july which was deliberate. the time has come, as it were, a good response. secte chasing down a few s of the industry. it is not all new, it is a continuation of what came before. we have to do more there to alert them. nejra: like what for example? platforms the trading where they have high frequency trading going on, that is a new world. nejra: you said you will work with firms in january. with any firms that haven't made any real or genuine attempts to be ready, how hardware you come down on them? there will be per message is going out, you have not made any progress. andt turn up on our door asked us to solve the problem in the morning.

what we don't want and this is ,hy we have structured the work we don't want to see dislocations on the third of january or the other days thereafter. we have been very much focused on what we need to do to make sure the markets are functioning effectively. nejra: in terms of proportion, you expect to be ready by january 3? there are so many different sectors and subsectors but high proportion yeah. managers met the and it was an attempt to get clarity on the rules. many people are trying to get their head around them. the report said there was no solution, why not? meeting, which the industry convened and we had some colleagues there, is about one issue. research.

issueason that this is an is that there is a different approach toward paying for research in europe. and in the u.s. firms have pointed out that there is a difference of regimes. they can get stuck in the middle of that. there pointed out to the european authorities and u.s. authorities. european solutions, the commission, as we are involved in this, as are the american authorities yet we have to come to solutions. i will give you my view. this is an issue we have to solve before the end of this year. we need to solve it pragmatically, i don't want to see firms left in the horns of a dilemma with two sets of authorities from both directions. constructivee a approach. we are having conversations. there are various things that might be done.

the comment that it isn't settled yet, it isn't but the discussions are happening. nejra: you say there are discussions around what might be done. what are possible solutions that might be most favorable to you? >> the discussions about the way firms organize themselves. the question about where the research is provided from, that is one set of discussions. there will be discussions between authorities about, how can we best reconcile these positions? keep the necessary ingredients faithful to the rules put in place? i don't want to predict exactly what the outcomes will be but i will say that it is encouraging that there is positive engagements. , the fca can'te solve this on its own. , we know weagement

have to solve this issue. nejra: that was andrew bailey, head of the uk's financial conduct authority. more from our exclusive wide-ranging interview next. this is bloomberg. ♪

nejra: welcome to "bloomberg markets: rules & returns." let's get a roundup of the latest news on financial regulation. scandinavian regulators are warning finance professionals that they are unlikely to get the clarity they crave on mifid ii before it takes effect in three months. gives localifid ii regulators some freedom about how to tell managers to comply. swedish and danish officials say it is hard to provide guidance in inducements. won't be on the hook

-- nordairdare bank stronghey say it is enough to withstand shock. a former conservative government minister told bloomberg that the new research rules under mifid ii could end up being positive. >> have research to be more genuine, i think it is a good thing. firmsd guess the smart in the wayresearch of identifying a differential in between them and the others will be happy to pay for themselves. >> that is your regulation news roundup. nejra: thank you so much, ed. let's get back to our interview with andrew bailey.

how do the regulatory implications of brexit complicate mifid ii in the u.k., if they do at all? >> we are implementing mifid ii as a member of the european union. we have made that very clear since the day of the referendum. as long as the u.k. remains a member of the european union the u.k. has to go on implementing european union law. mifid ii is one of the biggest pieces of implementation we will be doing during this period. heels of that, in the context of the withdrawal legislation in the u.k., we are working with the government, having to go through all the regulation and the rules that come from the european union and work out how to transport them into u.k. legislation and rules. that is a big job. we are well underway. that includes having to deal

with mifid ii among other things. we are trying to work out how to transport it into u.k. legislation. which is challenging in terms of timetables and load but we are having to do that obviously. the commitment of the u.k. is that on day one, we essentially have the same framework of legislation, rules, operating as is the point from which the u.k. goes forward. nejra: does this in any way mean you will have to adapt more as -- as the fca, u.k. firms might get more time or leeway? eu, andmember of the the same way as the other members and then we are working out what it means to be transporting into the u.k. realm.

it is a like for like in that sense. when you do this work, how do we transport it? we tend to call this the inoperable's. framed and a european union institutional setting and you have to move it into a national u.k. setting. the institutional structures are different. the governing principle doing it is, we are not amending it, altering it, changing it. i have always wanted to do something there, that is not happening. nejra: does it add another layer of complexity for u.k. firms? >> the spirit of it is to make it as like for like for firms as possible. we are not time to say to firms, you have to go through mifid ii implementation again. that is not our objective. nejra: when it comes to anothering for banks,

issue around brexit, you have said another issue in your planning as to how ago -- how to go about these authorizations. do you have a framework in place and will it be more lenient than the eu's framework once the u.k. leaves? >> the framework we want and will have in place is first of all governed by the philosophy that we want to have open markets, i'm a strong believer in free trade. the passport function is a subject of european union law. what that means in terms of inward authorizations is where firms want to continue to operate in the u.k. as they have in the past using the passport system we will need to devise a system of authorizations to allow them to do that. the big question we need to mean that, does that

we have to find a way to do it all by day one, fully start to finish? experiencede domestically, we could use a system of interim permissions. authorizations where we essentially continue the system of continuing the operation as before and then we will bring them properly and formerly into the regime. worth looking at in my view. for two reasons. the time available, practical matter. the second, we have to have half an eye on what the future regime looks like in terms of the relationship between the eu and the u.k. and what any implementation period looks like. a regulator, how can

you get this framework in place when you have pointed to the fact that you need to know the nature of the future relationship between the eu and the u.k. and that is still unclear at this stage? whyew: that is one reason they could make sense to look at an interim regime. we would be in a holding pattern. more about where it will land eventually and we don't know that yet but it is important in terms of continuance he planning that we have options available to us and that we are not saying, we will hit a wall at that point and what do we do? from my point of view because we have a lot of firms that would want to continue authorization, we want them to continue, we need that option up our sleeve. c,jra: when it comes to synte people are concerned post-brexit.

will the regulatory environment be more open, will it need to be to attract those startups? >> it depends on two moving parts. we and the u.k. have been open. interestingly, i saw this as a board member before i became chief executive, there has been , important mindset change about what you can and can't do and there has to be some truth to it, but we do have a role as regulator to enable change. we are not picking winners. we are having to ask the question, because the rulebook was designed for a different age of technology and use, it gets in the way of ways we should look at.

the fca has taken a big lead. we have strong alliances now with other parts of the world, singapore, hong kong are two examples of countries that followed strongly. i hope we will have the same relationship with europe, with the eu, we talk about it. there is a lot of desire. i don't see it as a race. fintech and who doesn't. it is borderless. nejra: when you look at things like cryptocurrency and contracts, do you see any need to regulate around initial coin offerings and contracts? a warning ont out initial coin offerings and that was a consumer warning. it said it said, you could lose all your money. it was blunt.

cryptocurrencies, i think it is say,,ing that i have to how does that work? that was andrew bailey, head of the financial conduct authority. up next, reshaping the research relationship. we talk about the buy side. the complex issue of valuing research. this is bloomberg. ♪

♪ >> it will be challenging. it will be rocky. meaning, there are contrasting forces. the first force is, if i need to unbundle and pay separately, i will start saying, i i don't want to pay for this or i will pay less for this. >> that is what every client should do. >> going in the opposite direction is, before because of strong relationship and bundling

, i was buying a service from operator a, which is actually not, when you look at the facts, top quality. now i can justify buying that service from competitor a. our view is, i then need to justify that i am paying something for that service so c which are and better than competitor a should gain value and share in those segments. how will that land? lots of dislocation and movement and reaction as everyone adjusts to that. all findll be that we a way to make it work. the problem is, as i stand here in september i think everyone has run scenarios. i don't think anybody in an investment bank, we'll tell you, i have it all figured out and on january 1 i know how i will approach it and all my dividers know it and we are aligned.

there will be adjustments throughout the beginning of next year. let's keep the conversation on mifid ii and specifically the buy side. earlier, we talked about how the new rules will reshape the relationship between asset managers and clients. >> this is a critical juncture in the industry because the will involve owners very directly in the research projects for the first time. asset owners are going to have to ask detailed questions about how research spending my change from historic norms which govern product returns that decisions are being made on. it will reshape this entire relationship between the two. assumption that absorbing research costs will eliminate regulatory and client

scrutiny and if that is the assumption, is a correct? evolving. a number of managers saying, they will pay out of p&l for european clients but not u.s. clients. it remains to be seen how asset managers feel about that. if we have managers moving to p&l, we want an idea of how much the research has changed. if it is reduced it may have an impact on future performance. managers are starting to benchmark research spending in the same way they have measured trade cost. and is starting in the u.s. for owners who are receiving budget proposals, they will have to have some way to judge what is a reasonable budget. nejra: we talked about european versus u.s. how should asset managers position themselves under mifid ii to gain a competitive advantage? >> aligning the research budget with the investment strategy sold to the asset owners. the fca would agree, if they have agreed on a budget, and

they can show that spending directly supports that, the regulators have done the job. the asset manager has done a good job for the client making sure the spending directly supports the return profile that the asset owner wanted exposure to. nejra: we have had various numbers come out from the sell side of how much research might cost. the big question is how much asset managers are willing to spend. how much do you think is reasonable? how much will they spend in the context of expected returns? be worthme service can different things to different people. the value of a report on facebook is a limited value to a deep value investor because the stock is so expensive. the regulators accepted that the same thing is not worth the same for different people. different strategy require

different amounts of research. what is the right price of research? the amount a manager has to pay to get the external research that strategies need to deliver targeted returns to investors. that is the contract they have. they have to ensure the research is appropriate. what owners and managers will recognizes, not all subjects require the same research. comments research searched i need for an emerging market distress credit that is about to reorganize under the bankruptcy laws in sri lanka? an enormous amount. more exoticn, strategies will be more research intensive and that will guide the valuation. it will be specific to each firm. within the buy side, will we see a divergence, for example between long only and hedge funds? >> it remains to be seen. most hedge funds are planning to use client money for research,

as reviewers will be aware. many owners have said they will opt for p&l. those managerst using client funds will be subject to increasing regulatory scrutiny. they will have to have a mifid ii research valuation policy which spells out how they are pricing research. been: some people have commenting on the fact that not just with mifid ii but with other regulation as well, there is pressure on active managers and we could see more consolidation. do you think that is what we will see? >> it is possible but the other thing that will help active managers is they have new tools to share research more efficiently. if they can explain to the asset owners and regulators how they roi on research spending this will be the difference between winners and losers coming out of this equation in our view. principalt was neil,

at frost consulting. that is it for this episode of bloomberg markets, rules and returns. if you have any questions comments, or concerns, you can email the team. nejra cehic. this is bloomberg. ♪

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