The European investment research market is expected to experience disruption and fragmentation in 2017 ahead of MIFIDII’s implementation in January 2018.
Equity research buyers will need to rethink their existing research management processes to ensure they are ready to comply with the new rules.
In this piece we outline everything that buyers need to know about MIFIDII and suggest ways that investors can capitalise on changes to the investment research landscape to drive smarter investment decisions.
Key Points:
- MIFIDII will require the unbundling of research payments from execution spending
- Investment research must be paid from a fund manager’s own account or via a separate client research payment account “RPA”
- Buyers must establish in writing their procurement rules, especially concerning the value research brings to their investment process
Impact of MIFIDII on the Equity Research Market
After years of intense consultation and lobbying, the European Securities and Markets Authority (Esma) has announced that its capital markets reform legislation will come into effect in January 2018.
Ahead of its implementation, MIFIDII is already causing disruption in the equity research space.
To comply with the new regulation, global investment banks, including Barclays, Citigroup, JPMorgan, Citigroup, Morgan Stanley, Nomura and UBS are devising new pricing models to remain competitive.
“In an unbundled world, where payments are separated, competition for equity and credit research may increase as asset managers look beyond traditional sources, which may trigger fragmentation,” say Bloomberg Intelligence Analysts Sarah Jane Mahmud and Alison Williams in a recent article by Bloomberg.
MIFIDII Likely to Cause Disruption in Investment Research Space
Nomura, Japan’s largest brokerage firm, closed its entire London-based equity research division in April of this year because it felt that MIFIDII will put the firm’s bottom line under sustained pressure.
In a statement made in April 2016, Tetsu Ozaki, chief operating officer at Numera, said: “This exercise will deliver significant efficiencies and cost savings for Nomura, refocusing the firm’s activities and reallocating resources towards its areas of expertise and most profitable business lines.”
Nomura is not alone in its concern that MIFIDII will bring increased scrutiny and potential losses to its equity research division.
“The first question any equity researcher we interview asks us is about MIFID and our approach,” said Laura Janssens (co-head of equity research at Berenberg) in a recent article by eFinancialCareers.
But while many global investment banks and brokerage firms are pessimistic about the outlook of the equity research market post-MIFIDII, there are several independent research providers who expect to gain market share as a result of Europe’s move to regulate research unbundling.
Independents Poised for Growth In New Regulatory Landscape
“Investment banking research is changing and there’s greater demand for more in-depth, longer-term focused information. It’s easier for us to innovate, and we’re nimbler without the same cost-bases of the big firms,” Andrew Howard (former CEO of independent firm Didas Research) recently told eFinancialCareers.
In a March report published by PwC entitled “Into the Future of Investment Banking,” the consultancy wrote that research providers who offer expertise on specialised areas will be the types of institutions to create ‘market-leading research.’
The equity research providers that are most likely to attract buyers will probably be the firms that provide in-depth, differentiated actionable insight at a reasonable rate.
Many independents operating within Europe are already getting the attention of equity research managers because they provide meaningful solutions to the problem of information overload.
“The industry has been distorted by a marketplace that is inefficient. My view is that we need to completely rethink how the business works,” says Smartkarma Co-Founder Jon Foster.
For more on how independents are poised for growth in the European investment research market, read our blog post here.
Smartkarma’s Buyer Advice
Our advice to buyers is to do a hard assessment of the research you are receiving- how much you really need and how much you’re paying for it.
Institutions reviewing their research procurement processes should take a multi-faceted approach when evaluating research purchasing post MFIDII. With an increased focus around cost transparency, buyers should look for consumption analytics, which aid in assessing usage and value add.
Buyers may also want to look into research marketplace models, which provide a direct link to research providers and can reduce costs associated with traditional research operating models.
Finally, clients paying for research via an asset manager should look for a clear and quantitative approach to measuring research value with appropriate oversight and governance in place.
