Despite significant rules designed to unbundle research costs within the asset management industry - which came into force under the second Markets in Financial Instruments Directive (Mifid II) - many of the behaviours undertaken before the directive have continued, says Chris Turnbull, co-founder of Electronic Research Interchange (ERIC). For example, it's still common practice for market participants to decide on the value of research after consuming it, he says.
“The regulators haven’t really got to grips with it, and we haven’t seen much from them so everything just sort of carries on. It’ll be interesting to see whether the regulator actually sticks their head above the parapet and does anything,” says Turnbull.
Today marks the first anniversary of the arrival of Mifid II, which required buyside firms to purchase research as an unbundled product, detached from execution fees. However, despite many in the sellside following the rules, they’ve had little impact on how the market conducts itself.
“This time last year you had a lot of the major brokers and banks who had cut the price of access to research to such a point that it was really quite cheap to get research,” says Turnbull. “What they wanted to do was to try and make up the balance on interactions so what we saw developing was an environment where any interaction that any individual had with a research provider had to be noted and valued, and then payments were made on the back of interactions. It’s all been about interaction monitoring rather than about agreeing a price for research and paying for it up front.
“So it’s stayed much the way it’s always been – with research effectively being handed over for free and asset managers deciding what to pay for it after they’ve extracted the value,” adds Turnbull.
For Gianluca Corradi, head of UK banking at pricing strategists Simon-Kucher, uncertainty in the market has caused something of a price war, which could encourage an oligopolistic research industry with a few major players if left unchecked. For Corradi, different asset classes should have been treated in different ways under Mifid II.
“The way the regulation is structured right now, it doesn’t consider that equity research is a completely different story to fixed income research. In equities, customers already used to pay for research, the regulation just unbundled it. And the coverage is a lot more ‘company by company’. In fixed income, currencies, commodities, the asset managers and hedge funds were used to receiving trade ideas – but they were just trade ideas, and they were for free. Now the regulations treat the different asset classes the same so we have equity saying ‘yes we should charge them’ and fixed income people within the investment banks saying ‘my customers don’t want to pay for it’”, says Corradi.
Both Corradi and Turnbull believe markets are much more transparent, and so national conduct authorities (NCAs) – such as the UK’s Financial Conduct Authority (FCA) are unlikely to look closer at the regulations.
“Basically most asset managers are now paying for research from their own P&L, and if they’re not paying for it then their clients are well aware of the charges,” says Turnbull. “It’s far more transparent and the view the FCA might be harbouring is that it’s a bit of a success for them.
“You’ve got the payment for research coming ostensibly from the asset manager’s P&L therefore the man in the street – the retail investor – is out of the equation now, and in some ways protected. If you’ve got major supply side, major demand side people meeting and acting in a professional way then they are doing so in a way that is commercially sensitive so there’s no real problem any more,” he continues.
“Perhaps the view of the regulator is that basically they’ve done what they wanted to achieve - which is getting the payment of research onto the P&L.”