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Asset managers should be able to pay for their investment research alongside trading fees, the UK market regulator has suggested, reflecting a long-standing policy in a bid to revitalize UK capital markets.
Fund managers should be able to “bundle” investment banks' research fees with their trading costs after a review of the controversial practice, the Financial Conduct Authority said on Wednesday.
Her proposal builds on an important provision of Mifid II, or the EU's post-2008 financial reform package, which is being led by politicians and regulators in London.
Although the rules were intended to clamp down on conflicts of interest and promote independent coverage, they resulted in less coverage of small- and mid-cap stocks. After the UK left the EU, some Westminster politicians and think tanks encouraged the UK to get rid of the rules. EU officials are also rolling back their own investment research rules.
Last year, Britain's finance minister, Jeremy Hunt, said he would encourage more research into small and medium-sized companies and entice more companies to list in London.
“It's ironic that this will probably be labeled as post-Brexit freedom, but we're the ones who pushed this on the Europeans, we're the ones who led this,” said Mike Carodos, founder of Substantive Research, an investment research analysis firm. . .
He added that changing the rules alone is unlikely to boost research on new asset classes or companies. “None of this will happen without the demand coming from the end investor in the new areas…which then requires outside research to service those assets.
Bill Hunt chief executive Stephen Vine told the Financial Times that the move was “one of a series of measures necessary to revitalize UK markets”.
The Mifid II rules came into force in 2018 and resulted in a decoupling of the fees charged by investment banks to asset management clients for trade execution and research.
However, this “unbundling” has often left asset managers paying upfront for the cost of research, putting greater pressure on smaller firms in particular.
There is a degree of “the horse has already bolted,” said Barry Norris, equity fund manager at investment firm Argonaut Capital, adding that “the quality of brokerage research is also much worse now than it used to be.” Another is that banks, having lowered transaction rates, will now struggle to raise them again even if that includes research.
Under the proposals, asset managers would be able to choose whether to pay for research separately, or with other trading services.
The financial watchdog said the move would give fund managers “greater freedom in how they pay for research and support their investment decisions” and would bring the UK more in line with EU and US rules on paying for investment research.
“Small asset managers are having a tough time and are likely to consolidate costs and pass them on to end investors,” an industry executive said.
He added that the FCA was “trying to ensure there is plenty of research produced for small companies in the UK”, noting that research fees for small-cap stocks were generally low.
Independent brokers – especially those who trade penny stocks – have felt the pressure, as the Mifid II system has made it difficult for them to compete with larger investment banks. Many small brokers have been forced to divest their research teams or merge with competitors.
