The UK’s Financial Conduct Authority (FCA) has launched a review into the application of Mifid II regulations and the unbundling of research costs.
It plans to write to asset managers, investment banks, specialist brokers and independent providers to ask for details about research pricing models, governance and decision-making related to research provision and pricing methodologies.
The review is expected to last six months.
The news comes nearly six months after Mifid II came into effect. The impact on the market is as yet quite unclear, but RSRCHXchange’s latest buy-side survey sheds some light on investor attitudes to the changes.
These are broadly that it is positive for end-investors, negative for research providers and mixed for asset managers.
Seventy-eight per cent of respondents within Europe thought unbundling was bad for brokers, where as 53% felt it was a good thing for investors.
The firm canvassed the views of 418 respondents from more than 30 countries, representing over 350 firms with more than $30 trillion of AUM in aggregate.
The thorny issue of pricing has seen a race to the bottom, but asset managers are fully aware that the levels that have now been reached are unlikely to last.
When the regulation was first proposed, the expectation was that full services research packages could cost up to $1 million for some large firms, but that figure swiftly fell to $100,000 and then even down to $10,000 in some cases as providers sought to lure clients.
“It is very interesting that three quarters of respondents thought that the current low prices were not sustainable,” says Davies. “People are being realistic, which is a bit of a surprise.”
Unsurprisingly, the real impact of Mifid II on research provision is being felt in Europe, with 50% of respondents outside the region seeing only a moderate change.
“Outside Europe, firms can cherry pick the bits of research unbundling that work – the bits that resonate with asset owners,” says Davies.
The regulation has hit smaller asset managers and small cap companies hardest, with 82% believing it would result in reduced coverage for small and mid-cap stocks. Forty-five per cent of respondents from smaller asset management companies felt worse off because of reduced research access, far more so than their peers at larger firms.
“Smaller mid-cap managers are the biggest spenders on research on our platform and there is an appreciation by these managers that there needs to be a lot more heavy lifting,” says Davies.
Sponsored coverage had been mooted as one solution, but instead 88% of respondents believed that market forces would resolve this issue.
“There is overcapacity in the research market,” says Davies. “Research has followed liquidity, not alpha, so where there is overcapacity that capital should find its correct place.”
Many respondents to the RSRCHXchange survey thought that less content from fewer research providers would impact their performance over time.
“That is quite a value judgement to make,” says Davies. “Managers are saying that they are willing to see their performance suffer to save money. This may drive a wedge between pseudo active/passive managers and true active managers.
“True active managers will spend more on research: everyone penny pinching gives them an opportunity to say to providers ‘I wasn’t your best client before, but I am now’.”
Market forces might well resolve these issues, but the FCA’s announcement reveals a certain concern at the regulator about how quickly this might happen.
Vicky Sanders, co-founder with Davies at RSRCHXchange, says: “The FCA flagged in April that research unbundling would be a focus for their supervisory work this year, so there are few who should be surprised that they are starting to formally ask questions.
“Mifid II is having a profound impact on the research market, but it’s still early days. Given the scale of change introduced by unbundling, I would imagine that the FCA’s work won't just be a one-off but an ongoing, iterative process.”
Davies also emphasises that the impact will be ongoing.
“People struggle to grasp that this is an event in time,” he says. “The change did not happen between 23.59 on January 2 and 00.01 on January 3. The effects in Europe will ripple on for a number of years.”