MiFID II came into force on 3 January 2018 and overhauled the way in which firms pay for research. Previously, research was not priced separately and was usually bundled together as part of other services provided by firms. Under the new rules, sell-side brokers are now obliged to unbundle their research from other services provided to clients and on the buy-side, asset managers now explicitly need to pay for research themselves.
The FCA carried out a review of the rules a year after they were implemented to see how they were operating in the market and it released a report on its findings on 19 September 2019. In overview, the FCA found that the new rules are working well and that this had led to positive changes in firms' behaviour.
The key findings of the review are as follows:
The FCA found that, in general, sell-side firms were aware of their obligations for disclosing costs and charges to clients which had led to significant savings for investors. The way that most buy-side firms have implemented the new rules has improved accountability and scrutiny over both research and execution costs. Most firms surveyed have chosen to absorb the research costs themselves, which had resulted in estimated cost savings of around £70 million for investors in UK-managed equity portfolios during the first half of 2018 as compared with 2017.
Likewise, on the buy-side, things were working well and with firms still being able to gain access to the research they needed. Since the introduction of the reforms, budgets set by firms to spend on research have fallen on average by 20%-30%, although the FCA identified only a very limited reduction in the quality and coverage of research, including for listed small and medium enterprises (SMEs).
The FCA's review identified a variety of pricing models being used by asset managers and with differing degrees of sophistication. The FCA expects buy-side firms to refine their research valuation models over the course of time as, according to the review, some firms are currently focusing too much on measuring quantity, using a fixed rate card and with prices based on volume rather than focusing on quality and acting in the best interest of their clients.
There were a wide range of sell-side research pricing levels being offered, which the FCA attributes to an ongoing process of price discovery. The FCA states that it will monitor this area for potential competition concerns in the market and will act if they feel it necessary to do so.
In some cases, firms have been uncertain about the way in which the new rules apply to them in certain situations, such as when attending trade association events or marketing research services.
Given that firms are continuing to develop their arrangements, the FCA intends to undertake further work to assess the impact of the new rules in 2020/21.