FCA review finds investor happiness with MiFID II research unbundling
A review by the UK’s Financial Conduct Authority (FCA) has found that research unbundling under the second Markets in Financial Instruments Directive (MiFID II) is improving asset managers’ accountability over costs.
The watchdog found that the most asset managers are now choosing to pay for their research from their own revenues instead of using client funds. As a result, it claims that investors in UK-managed equity portfolios saved around £70m in the first six months of 2018. It estimates that these savings could reach £1 billion over five years.
Edison Group: “This will likely be disappointing for independent research providers”
Under MiFID II, which came into force on 3 January 2018, asset managers have been required to pay for research separately from execution services. Prior to this, research costs were bundled with transaction fees often borne by the investors’ funds.
The FCA review found that budgets set by firms to spend on research has fallen on average by around 20-30% since the introduction of the regulation. Buy-side firms told the FCA that despite these restrictions they are still getting the research they need.
Despite this, asset managers also indicated that they were uncertain about non-monetary benefits outside of research agreements. Due to this uncertainty some firms have been blocking all marketing material or free trials from research providers and refusing to attend trade association member events.
Independent research providers (IRPs) compounded these concerns by adding that levels of pricing in the market were potentially too low, leading to large multi-service banks internally cross-subsidising their research, making it hard for the IRPs to compete.
Neil Shah, director of research at Edison Group, said of the review: “This will likely be disappointing for independent research providers who service the buyside as the regulator is not going to do anything about the research pricing environment. Knowing that, this is the pricing environment now and for the next 18 to 24 months, it is likely to lead to a review of business models and consolidation opportunities.”
A March 2019 survey from the CFA Institute found an average 6.3% decrease in research budgets, while the coverage of small- and mid-cap stocks had decreased according to 47% of buy-side and 53% of sell-side respondents. 39% of those asked indicated that the research marketplace had become a more competitive one.
