The European Association of Independent Research Providers has called on regulators to remedy faults in the implementation of new regulations that were meant to separate payments for research from trading commissions and create a level playing field for competition to the large investment banks.
Payments for research by asset managers have traditionally been combined with trading commissions leading to a lack of transparency for end investors who were paying the commissions without any monitoring of the quality of the research being provided, and whether they were receiving best execution. MiFID II, the regulations that went live in the European Union this year, requires fund managers to either pay for research themselves from their P&L or to use a research payment account, where the budget has been agreed with the client.
The second annual Euro IRP Members Study found that 80% of members were calling on regulators to take urgent action to address that flaws in research pricing under MiFID II.
“This is not in the main due to regulatory failings, nor to the attitude or activities of asset managers,” said the study. “Rather it is predominately the continuance of cross-subsidisation of their research by investment banks and major brokers, which is subverting and restricting a true level playing field for research providers, and preventing the best outcomes for end investors."
The study said the price of research from investment banks does not cover the total cost of production and they are maintaining artificially low prices.
One member said in the report: “Bulge bracket pricing is clearly an inducement and a direct breach of the law. Not to do something is to accept that the bulge bracket can choose which laws to abide by and which are only optional."
The Financial Conduct Authority announced at its asset management conference in June that the UK regulator was launching a review of how asset managers pay for investment research and corporate access under MiFID II.
Law firm Bryan Cave Leighton Paisner said in a blog that the regulatory review was unsurprising due to the extremely low prices for research offered by larger institutions. The blog said: “It is still too early to know what the outcome of the review will be or, indeed, how the review will unfold and over what timetable. However, it is helpful that the FCA has recognised that uncertainty remains in the realm of investment research and corporate access, despite or in spite of the MiFID II changes, and the unintended consequences caused by these changes.”
Euro IRP also urged regulators to make clear that it is acceptable under MiFID II for asset managers to accept some sample research from an independent provider before a formal trial.
One member said in the report: “FCA presentations have included the fact that providing some sample research, prior to a formal trial, is perfectly OK. That’s news to the buy side. Clear guidance on that ability would make any introduction much more productive’.
A recent survey by RSRCHXchange, the marketplace and aggregator for institutional research, found that confusion over pricing was one reason why nearly two-thirds, 63%, of buy-side firms have been taking fewer meetings since MiFID II went live.
