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MiFID II: a new paradigm for investment research

Live from January 2018, MiFID II bans inducements from bankers/brokers to asset managers, which might lead them to act against asset owners’ best interests (eg by over-trading). This completes the regulatory drive to insist that payments for research are unbundled from fees for executing trades.

The reforms make payments for research much clearer to the ultimate asset owners and call for upfront agreement of budgets. The latter is a challenge to the broker-vote model for retrospective allocation of commissions to pay for research, since it means a price should be agreed in advance for a specified service.

Asset managers will be expected to turn unsolicited, or free, research away unless it is a minor non-monetary benefit, such as where the material is generally available. This loophole is proving controversial as some investment banks make macroeconomic research available cheaply, or even free. The European Securities and Markets Authority (ESMA), in a Q&A on the regulation, has pointed to recital 30 of the MiFID II Delegated Directive, which says: “any non-monetary benefit that involves a third party allocating valuable resources to the investment firm shall not be considered as minor and shall be judged to impair compliance”.

Research with anything other than a minor benefit will have to be paid for by asset managers either directly, as an operating cost, or from a separate research payment account (RPA) where the costs are passed on to the asset owner. While the RPA resembles the current CSA, the rules have been ratcheted up. An important requirement is for a rigorous assessment of research quality, based on its ability to contribute to better investment decision-making.

The regulators want to see a research market develop with transparent pricing. MiFID II is supposed to level the playing field between research providers. These currently fall into two broad camps:

  1. The ‘sell-side’, which sits within investment banks or broking firms, where the researchers or their colleagues work for corporate clients and other issuers of securities, and where trading is integral to the business model.
  2. Independent research providers, or IRPs, whose clients are asset managers – the ‘buy-side’. While they can be paid via CSAs, they are more likely to be paid directly by subscription or on a consultancy basis.

Source: "A Level Playing Field for Investment Research?" Jane Fuller (pdf)