The UK financial regulator is to begin a review of the EU rules that changed how asset managers pay for the research they use to make investment decisions.
The Financial Conduct Authority, the City regulator, is concerned about inconsistencies in the interpretation and application of the Mifid II regulations, which came into force in January.
Mifid II requires asset managers to separate the cost of research from transaction charges and trading commissions, a process known as unbundling. The move was intended to improve investor protection by ensuring that asset managers’ decisions could not be influenced by receiving research free.
The FCA announced the review at its asset management conference last week. It said it would start to contact fund managers, investment banks and brokers within weeks.
The system that existed previously, in which trading orders could be directed to the bank or broker supplying the information, was opaque.
Now, however, at least one aspect of the change brought about by Mifid II is in question.
“The costs of research packages offered by some of the big banks are totally out of whack with pricing elsewhere in the market,” said Joshua Maxey, managing director of Third Bridge, an independent research company, who welcomed the FCA probe.
“There are questions over whether some of the pricing packages for research could be viewed as an inducement and contrary to the Mifid rules.”
The FCA wants to evaluate the effect of the rules on the use of research. Within weeks it will write to asset managers, investment banks, specialist brokers and independent providers to ask for details about research pricing models.
It also plans to ask about governance and decision making related to research provision and to examine any outlier models of pricing methodologies.
The Mifid rules also require banks and brokers to charge fund managers separately for “corporate access” such as face-to-face meetings with company management.
The pricing of corporate access will be part of the FCA review, which is expected to take six months to complete.
Mifid II has led to dramatic falls in prices for research. Price quotes from some big banks for the entirety of their published research output have fallen to between $10,000 and $30,000 annually, from six-figure costs that were first mooted a year ago.
Mhairi Jackson, a manager with the FCA’s wholesale conduct policy team, said the regulator recognised that the market was still working out the most appropriate price for research but she cautioned that investment banks could not offer “unduly favourable terms” for it.
“Any all-you-can-eat research offerings are potentially more prone to fall short of the spirit of the Mifid rules,” said Ms Jackson.
Oliver Lodge, director at Owl, a London regulatory consultancy, said valuing research was “not a simple matter”.
“If a bank already provides its research to 100 firms, then provision to the 101st is effectively free,” said Mr Lodge.
Th existence of carve-outs in the Mifid rules have created legal uncertainties. Content that is not deemed “substantive”, such as a short market commentary, can qualify as a “minor nonmonetary benefit” and would therefore not need to be paid for.
However, exactly what is classified as “substantive” is unclear.
Terence Sinclair, global franchise director at Citi, the US investment bank, said Mifid II had led to clear changes in how research was being used in Europe. “Our analysts are being invited to fewer meetings by asset managers but their research is being read more,” he said. “The number of requests for bespoke research has also gone up.”
Mr Sinclair added: “Clients are using the sell side more for its publishing role and less for an advisory role.”
He said banks asset managers consuming research on a global basis were “very uncomfortable” with the fact that disparities in the rules between Europe, the US and Asia had led to differences in how clients across the world were treated.
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