The UK’s financial regulator, the Financial Conduct Authority (FCA), has proposed a plan that will reverse a key part of the MiFID II reforms.
The FCA’s plan would enable asset managers to ‘bundle’ their investment research payments with broker fees.
The proposal goes against a rule adopted in 2018 as part of the MiFID II reforms that forces asset managers to separate the payments made for research and those for trade execution.
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Furthermore, those payments must be made from either the asset manager’s own resources or from a dedicated account.
According to the FCA, while most asset managers are “largely getting the research they need” under the current rules, there is an operational complexity involved that unfairly favours larger asset managers.
It is also more difficult to buy investment research produced from outside the UK, states the regulator.
Asset managers concerned by MiFID II’s research unbundling
This position differs from the FCA’s initial review in 2019 that stated that the unbundling rules had saved millions for investors and there was no evidence of a material reduction research coverage.
However, an independent report, commissioned as part of the UK government’s Edinburgh reforms, designed to make the UK’s financial services market more competitive post-Brexit, has come to a different conclusion.
“High quality, easily accessible investment research is a vital part of a healthy, dynamic capital market. It supports the decisions investors make,” said Sarah Pritchard, executive director, markets and international, at the FCA.
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“We are proposing to provide more options on how to pay for such research, helping boost competition and making it easier to buy research across borders.”
The FCA expects to produce final rules before the end of June, based on the feedback it receives from buy-side firms and end investor representatives.
According to Mark Shaw, partner at law firm Pinsent Masons, the FCA’s move is a recognition that certain parts of MiFID II did not ultimately benefit consumers. Furthermore, despite talk of Brexit-led divergence, the FCA’s position actually mirrors changes proposed by the EU at the end of 2022 and currently under discussion within the European Council.
However, said Shaw, any impact from the reversal on unbundling will take time to be seen. “The problem with this reversal is that most brokerages and banks disbanded their research departments after the research unbundling rules under MiFID II came in, so it’s unlikely that we’ll see any immediate benefit – although this might be something that could gradually return over time.”
