Supervisors are likely to review pricing models for research since the implementation of MiFID II to ensure that it cannot considered an inducement according to the Deloitte Centre for Regulatory Strategy.
The consultancy said in its Regulatory Outlook for 2019 that investment research is a key focus area for European Union regulators since MiFID II came into force in January 2018. MiFID II requires fund managers to either pay for research themselves or set up a research payment account, where the budget has been agreed with the client. Most asset managers have opted to absorb research costs, which has led to a drop in research budgets.
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“MiFID II has led to a large fall in the price of research as investment managers apply greater scrutiny to its value,” added Deloitte. “Although many investment managers have significantly reduced their research consumption, we expect them to continue to want broad coverage, albeit keeping quality under continuous review.”
Deloitte continued that authorities are likely to scrutinise pricing models to ensure research is not being accepted on terms which could be considered an inducement. The report cited the UK Financial Authority as signalling that “all you can eat” models, where a fixed price is paid for an unspecified amount of research, is likely to be considered non‐compliant.
“Several EU regulators have identified MiFID II inducements rules as a key area of supervisory focus in 2018‐2019,” said Deloitte. “We expect to see a particular focus on whether firms receiving inducements are providing appropriate additional services to clients and whether those services are proportional to the level of inducements received.”
The consultant noted that MiFID II has caused investment banks to turn their research divisions from cost centres to profit centres which could lead to a reduction in coverage or a fall in competition as some firms exit the market, especially for small-cap stocks.
Research is ripe for change
Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, the institutional trading network, said in a survey with Plato Partnership last year that MiFID II unbundling created greater price transparency - leading to fund managers becoming more discerning about how they access and consume research.
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She continued that the future sustainability of the research business model of bulge bracket firms is being called into question.
“As transparency over cost and quality of research emerges, our discussions tell us that portfolio managers are not only becoming more selective regarding which analysts they access and what they are willing to pay, they are exploring new methods of accessing investment ideas as firms come under increasing pressure to lower operational costs,” Healey added.
Active asset managers are facing increasing fee competition from passive and index funds, and automation.
“Asset owners need to become more efficient in marshalling big data along with human insight to develop diverse investment strategies most suited for the millennial investors of today,” added Healey. “The adoption of technology is moving from execution to investment and the impact of unbundling on research provision post MiFID II is just one element of the process; like the canary in a coalmine, it may be the precursor to far greater change that lies ahead.”
The survey found that more than three quarters of fund managers, 77%, are using alternative sources of research to traditional written research and 59% are investing in quants and data scientists. More than half, 52%, of buy-side respondents also said they access written research via platforms as an an efficient method of controlling access and tracking value.
Research aggregation
The increased use of platforms was demonstrated by RSRCHXchange, the research marketplace and aggregator, launching a Partner Provider Programme last month which included the first intake of sell-side firms, such as ABN Amro, ING, Numis, Peel Hunt and Stifel.
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Hester White, head of client strategy at Peel Hunt, said in a statement: “The RSRCHX platform allows us to advertise our research capabilities to new customers and to engage with them to finalise the commercial relationship.”