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

welcome to bloomberg markets, rules and returns. we delve into regulatory challenges and opportunities around the globe. we'll speak to top market participants generating rules. let's dive into the regulatory framework here in the u.k.. i spoke to andrew bailey and asked him about the hot topic on everyone's mind and. >> everyone is doing everything they can to be involved. to be out and about, making sure everyone understands what is

needed. we 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 might expect. the rules come into effect in january. our supervision will take over of the markets in the firms. we have done work to make sure, i expect to be taking, we will find things that are better than others, things that are going less welcome firms will tell us about that. nejra: you have already 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. we are chasing down a few sects 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? >> some of the trading platforms 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 firmere will be messages is going out, you have not made any progress. don't turn up on our door and asked us to solve the problem in the morning. what we don't want and this is why 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. nejra: 40% of the managers met 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? >> this meeting, which the industry convened and we had some colleagues there, is about one issue. research. the reason that this is an issue is that there is a different

approach toward paying for research in europe. with mifid ii, 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. it has to be 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. it seems to be a constructive 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. everything i see, the fca can't solve this on its own. i see an engagement, we know we 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 back to "bloomberg markets: rules & returns." i'm nejra cehic. let's get a roundup of the latest news on financial regulation. here's ed ludlow. ed: 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. by design, mifid ii gives local regulators some freedom about how to tell managers to comply. swedish and danish officials say it is hard to provide guidance in inducements. taxpayers won't be on the hook

should nor dare bank -- nordair bank, they say it is strong enough to withstand shock. a former conservative government minister told bloomberg that the new research rules under mifid ii could end up being positive. >> the presser to have -- the pressure to have research to be more genuine, i think it is a good thing. i would guess the smart firms that value research in the way 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. hot on the 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 we do, that is the point from which the u.k. goes forward. nejra: does this in any way mean you will have to adapt more as the sca -- as the fca, u.k. firms might get more time or leeway? >> as a member of the eu, and 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. the thing is 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 passporting for banks, another 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 resolve is, does that mean that

we have to find a way to do it all by day one, fully start to finish? or as we have experienced domestically, we could use a system of interim permissions. or interim 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. that is 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. nejra: as 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? andrew: that is one reason why they could make sense to look at an interim regime. we would be in a holding pattern. we need to know 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. nejra: when it comes to syntec, 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 a 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. of who has 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? andrew: we put out a warning on 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 something that i have to say,, how does that work? nejra: 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 competitor b and c, who are much better than competitor a, should gain volume and share in those sub segments. how will that land? lots of location and movement. that's just one scenario trade we might find another way to make it work. the problem is, as i stand here in september, everybody has run scenarios. i don't think anybody or their client will tell you, i've got out trade january

1, i know exactly how i'm going to approach it, all of my suppliers know it. there will be some adjustments from the beginning of last year. nejra: 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. very critical a juncture in the industry, because the method requirement wille mifid requirement involve owners directly in the research for the first time. asset owners are going to have to ask more detailed questions about how that research spending, how it might change from historic norms, which may have governed product returns -- it will reshape this entire relationship between the two. costs assumption that

will eliminate client scrutiny, and if that is the assumption, assumption correct. >> it's an evolving process, but we've seen a number of managers say we will pay for you. -- for european clients, not u.s. clients. it remains to be seen how he asset owners -- how asset owners feel about that. we will see how much that's research spending has changed. it may have been impact on future performance. asset owners are starting to market spending in the same way they have trade cost. for european asset owners, who are going to have all sorts of incoming research filipe:s wasn't proposals, you're going to have to have some way to judge what is reasonable. >> you talked about european versus u.s.. i'm wondering, how should asset managers position themselves under mifid ii to gain a competitive advantage? the key thing -- >> aligning the >> the key thing is >> 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 -- supports the objectives between the two, 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? >> the same service can be worth different things to different people. value of a report on facebook is a limited value to a deep value stockor in -- because the is so expensive. the same things are not worth the same two different people this goes back to, is this appropriate research for the

strategy? different strategies require different amounts of research. what is the right price of research? it's the mountain asset manager has to pay to get the research they need to deliver returns to investors. that is the contract they have with that. the clients, they have to ensure that research is appropriated. recognize, seeing that research, a simple example, how much research do i need for u.s. treasury bond? how much do i need for an emerging markets distressed credit, about to seeing that research, a simple reorgane under the bankruptcy in sri lanka? an enormous amount. higher return, more exotic strategies will be more research intensive and that will guide the valuation. it will be specific to each firm. nejra: within the buy side, will we see a divergence, for example between long only and hedge funds? >> it remains to be seen. i think most hedge funds plan to use clients money for research, as all reviewers will be aware.

many owners have said they will opt for p&l. that means those managers using client funds will be subject to increased regulatory scrutiny. that means, they will have to have a mifid ii research valuation policy which spells out how their pricing research. >> finally, a big picture question. some people have been commenting on the fact that not just with mifid ii but with other regulation as well, there is a lot of pressure on active managers, and we can see more consolidation. do you think that is what we will see? >> it is possible>>, but asset managers have to develop tools and technology to share research more efficiently. if they can explain to the asset owners and regulators how they are maximizing unresearched spending, this will be the difference between the winners and losers coming out of this equation. principal athe frost consulting.

that's it for this eight weeks episode of bloomberg markets rules and returns. if you have any questions comments, or concerns, you can email the team.+++

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