Amanda Khatri
Editorial Manager
Asset managers will be granted more freedom in how they pay for research to support their investment decisions, reversing a key part of the Second Markets in Financial Instruments Directive (MiFID 2).
Pre-Brexit, the UK was a main driver in the decision to unbundle payments for research as part of EU reforms.
However, new proposals by the Financial Conduct Authority (FCA) will drop that requirement and allow firms to choose whether to pay for research separately or together with other trade services.
In a recent consultation paper, the regulator stated that the current options available are “either operationally complex or may favour larger firms, impacting competition”.
It also believes the present regime hinders UK asset managers’ ability to purchase investment research produced outside the UK.
By providing more options on how to pay for research, the FCA hopes to promote competition in markets and avoid conflicts of interest when buying research across borders.
“High quality, easily accessible investment research is a vital part of a healthy, dynamic capital market. It supports the decisions investors make,” said FCA executive director of markets and international, Sarah Pritchard.
To unbundle or not to unbundle
How investment research should be paid for by investors has a long and controversial history and has been the subject of multiple legislative reforms.
The most recent, and onerous, was MiFID 2, and some commentators have noted the UK’s stance having shifted significantly since the major regulation was enacted.
“It is ironic that this is probably going to be positioned as a post-Brexit freedom, but we were the ones that pushed this on to the Europeans, we drove this,” said Mike Carrodus, founder of Substantive Research.
Asset management expert Mark Shaw of law firm Pinsent Masons said the FCA’s proposal is a recognition of elements that did not benefit consumers or the market and indicates a willingness to make incremental improvements.
“While MiFID II had noble objectives – including to increase transparency, better protect investors, and reinforce confidence – there are certain areas where it overreached and caused adverse consequences,” he said. “The research unbundling rules were one of these areas, which led to there being less coverage of smaller and mid-sized companies.”
However, Shaw said he expects the effect of the reversal to take a while to kick in.
“The problem with this reversal is that most brokerages and banks disbanded their research departments after the research unbundling rules under MiFID II came in, so it’s unlikely that we’ll see any immediate benefit – although this might be something that could gradually return over time,” he said.
What is MiFID II?
MiFID II was an update of the original rule from 2007, which sought to ensure transparency and harmony across the European Union’s financial services industry.
Lawmakers intended to restore confidence in markets after the 2008 financial crisis, but the ultimate result added layers of complexity for compliance teams.
The expansion of the original MiFID covered the increasing pace of technological change and the rise of high-frequency trading.
The emergence of new market structures and increasing data fragmentation triggered a shift towards more efficient trading technology, which resulted in the need for major reform of the financial services sector.
A new single European rulebook was drafted, along with a number of European regulators, as part of the MiFID reforms.
CUBE comment
The FCA’s efforts to make the lives of asset managers may mean more work for compliance teams, particularly those inside businesses that stretch across Europe.
For compliance, risk, and legal teams worried about the evolving regulatory environment, adopting regulatory intelligence solutions like CUBE can prove helpful in combating the onslaught of rule changes in the coming years.
CUBE uses AI and machine learning to automate the change management process, freeing up valuable resources and ensuring compliance with regulatory obligations.
To ensure your business complies with any research rule changes, speak to the CUBE team today.