FCA finds MiFID II research unbundling rules working well for investors

The FCA has published multi-firm review findings indicating the Markets in Financial Instruments Directive’s (MiFID II) research unbundling rules have improved asset managers’ accountability over costs, saving millions for investors.

A key principle of the MiFID II unbundling reforms was to ensure that portfolio managers act as good agents in the best interests of their clients and that their investment decisions are not unduly influenced by third parties.

From 3 January 2018, asset managers were required to pay for research separately from execution services, and either charge clients transparently or pay for research themselves. Prior to MiFID II, research costs were often ‘bundled’ into opaque transaction fees borne by investors’ funds, with many firms not adequately controlling how much of their clients’ money was being used to pay for research.

The FCA’s review found that, following MiFID II, most asset managers have chosen to pay for research from their own revenues, instead of using their clients’ funds. Firms have also improved their accountability and scrutiny of both research and execution costs, including where firms have chosen to charge research costs to clients. This resulted in investors in UK-managed equity portfolios saving around £70m in the first six months of 2018 across a sample of firms.

The review and analysis also found that:

  • since the introduction of the reforms, budgets set by firms to spend on research have fallen on average by 20%-30%;
  • despite these budget reductions, most asset managers said they are still getting the research they need;
  • research coverage of small and medium enterprises (SMEs) listed in the UK has not seen a material reduction to date; and
  • research pricing is still evolving, with wide price ranges being offered by brokers and independent providers.

Detailed findings in relation to asset managers’ approaches to valuing research, and the FCA’s expectations as to how certain activities, such as trade association events, research marketing and consensus forecasts, interact with the new rules can be found within the FCA’s multi-firm review report.

The FCA will continue to monitor both competition impacts and research coverage of SMEs following the MiFID II reforms by analysing market data and other reviews, such as the European Commission’s forthcoming study.

The FCA also intends to carry out further work in this area in 12 to 24 months’ time to assess firms’ ongoing compliance with the rules.


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