MiFID II Research Unbundling: A Survey Yielding Mixed Results
To celebrate the one-year anniversary of the introduction of the revised Markets in Financial Instruments Directive (MiFID II) in January 2018, CFA Institute revisited the controversial topic of investment research by conducting a survey of its membership. MiFID II aimed to bring transparency and competition to this area by forcing the unbundling of research payments from commissions. Previously, it had been common practice for research to be provided for free to investment managers with the understanding that it was being funded, in part or in whole, through bundled execution fees. MiFID II required brokers to provide a price for research that was separate from execution services, which in turn would force investment managers to decide whether to pass this cost onto clients or to absorb it.
Relatively quickly it became apparent that managers likely would not pass these costs onto end clients. Another significant concern, however, was that this change would have negative implications for research providers because buy-side firms would focus their research consumption on but a few select providers. Others thought that research unbundling would stimulate the provision of research in niches, such as small companies, as providers sought to differentiate their product offerings.
At the introduction of MiFID II, CFA Institute conducted a survey of its membership and found that the following:
- Most asset management firms intended to absorb research costs rather than charge clients.
- A majority of respondents expected to consume less research from the sell side.
- One year on from the adoption of MiFID II, CFA Institute conducted a follow-on survey of its membership that was released recently. This survey covered European members in the European Union, United Kingdom, and Switzerland. Out of 12,633 members, 496 responses were received and informed the findings from the survey.The key findings from this survey are as following:
- There appears to have been a negative impact on research employment with most buy-side respondents reporting sourcing less research, and most respondents citing a reduction in sell-side analyst jobs.
- Survey respondents report an average 6.3% decrease in research budgets, and this percentage is higher for the bigger firms.
- A plurality of sell-side respondents (44%) believe that small- and mid-cap research has deteriorated, which is a concern given that improving the provision of this kind of research was a policy goal of the directive.
- Irrespective of the quality, the coverage of small- and mid-cap stocks has decreased according to 47% of buy-side and 53% of sell-side respondents.
- A plurality of respondents (39%) do believe that the research marketplace is more competitive following the changes.
These findings suggest that reception of the new rules on research unbundling continues to be mixed, at best. Recently, the Financial Conduct Authority (FCA) Chief Andrew Bailey came out with a positive review of the rules and declared that they had saved UK fund investors £180 million in the first year. In contrast, Robert Ophèle, chair of French regulator AMF, is decidedly less enthusiastic about the unbundling rules, suggesting the AMF was not supportive of the FCA-led push for total unbundling. Ophèle cited a reduction in mid-cap research coverage as a motivating factor behind the reconsideration of these rules post-Brexit.
CFA Institute supported and continues to support the objectives of the research unbundling reforms, which should remove potential conflicts of interest between asset managers and their clients when transacting with brokers, and seeks to deliver a more transparent, competitive, and efficient market for research. It seems apparent, however, that some unintended and undesirable consequences have manifested in certain areas of investment research and that scope exists for iterative changes.
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