Is the panic starting to set in with the deadline for MiFID II looming on the 3rd January? Recently it feels as though a day doesn’t go by without a new report outlining firms’ readiness. In this edition I’m returning to a topic I touched on earlier in the year, and providing an update on it. Research.
Research has been one of the most hotly debated aspects of MiFID II. It is a topic affecting firms on both the buy and sell side. The key questions are:
How do we charge and then pay for research? and
When does it become an inducement?
It is these aspects of research which both the regulator here and in Europe have sought to address.
Article 13 (1) of MiFID II states that research received from a third party shall not be regarded as an inducement if it is received in return for either of the following;
- Direct payment by the investment firm out of its own resources, or
- Payment from a separate research payment account (RPA) controlled by the investment firm, provided a number of conditions are met.
In order to comply with the second point above, the RPA run by the investment firm must ensure that they meet the conditions below;
- The RPA can only be funded by a specific research charge to the client
- Regularly assess a research budget
- The firm will be held responsible for the account
- Regularly assess the quality of research purchased against a robust criteria and are able to demonstrate said research it able to contribute to better investment decision
Hmm, so it’s a tall order to comply with point number two, which might explain why we are seeing so many firms choosing to absorb all research costs
Hmm, so it’s a tall order to comply with point number two, which might explain why we are seeing so many firms choosing to absorb all research costs. The list of firms already choosing this option include JP Morgan Asset Management, T.Rowe Price, Vanguard, JO Hambro Capital Management, Rathbone Fund Management, Jupiter, M&G and Woodford Investment Management. Others are likely to show their hand over next few weeks and months during the run up to the compliance deadline. It has become clear that firms either didn’t know enough about how they paid for non priced research or find the requirements of running a RPA too onerous. Of the few firms that have come forward to say they will be paying and recharging clients for research, many have boosted their internal research capabilities and therefore dramatically cut their research costs already. This is likely to mean we won’t see dole queues increase with surplus Research and Investment Analysts. The only change will be that they are likely to have one employer for whom their research is exclusively reserved for.
What does it mean for customers? Is the unbundling of ‘charges’ going to produce the transparency that is intended by the regulations? Research will need to be priced competitively and independently of other services from now on and buyers of research will need to factor in the return on the investment. Our pension funds as well as our retail customers should benefit from this but call me an old cynic, I can’t help feeling firms who absorb the research costs will look at how those funds can be recouped. Maybe the pressure on fund pricing through the Asset Management Review will really start embedding TCF into providers’ future thinking.