20 October 2017

Financial Times: MiFID asks more questions than it’s meant to answer

Under MiFID II, banks and brokers will no longer be able to include, or “bundle”, the cost of research with other services they provide to investors, to avoid any suggestion of conflicts of interest. The nub of the problem is who pays and how much.

No one seems sure with just two months until MiFID II kicks in. As a financial journalist, sellside research can be useful — as a way to spark ideas, support market theories and, occasionally, provide a punchy quote. But it is far from essential and many investors may feel the same.

What cost there is will, it seems, mostly be borne by fund managers rather than their investors, and this again has an effect on smaller groups that can less easily absorb it. And, with banks cutting costs in their research teams, the smaller listed companies could languish without coverage — and with less attention from investors. There are many parts of MiFID II that are welcome in the general push for transparency and desire to give investors more information about what they are paying for. But the confusion about who should pay for research is problematic. Regulators also need to be clearer about what would be defined as an offence under MiFID II, as well as how they treat the thorny topic of research that originates outside the EU. They also need to encourage tech-savvy start-ups that can aggregate or create bespoke research on-demand. These would allow smaller fund managers with limited budgets to access specific research piecemeal. Flexibility will be needed in implementation and aspects of overseeing the rules. The UK’s Financial Conduct Authority was reported this week to be looking at the threat of “research price dumping” by big banks. Unread research has long been dumped in email inboxes — now, it seem, this will be an offence to more than just spam filters.

Full article on Financial Times (subscription required)

© Financial Times