The finance industry invested billions of dollars and significant time in adapting to the European Union's (EU) MiFID II market reforms. However, now both the UK and the EU are looking to roll back some of the requirements. This development is not expected to be a straightforward process due to the intricacies of MiFID II.
MiFID II was an extensive and complex regulation introduced to save consumers money and ensure that research provided by banks and other institutions would be of higher quality. As a result of the regulation, a massive restructuring of the research business took place, with some critics asserting that it was as much about marketing as it was analysis.
While the intention was to cut costs for consumers, the rules led to asset managers drastically reducing their research budgets. Consequently, many smaller firms that relied on investor support to grow faced difficulties. Market share among the largest banks also consolidated further. The planned reversal of the rules will take some time to be implemented by regulators, and it may be too late to have a significant impact, given that the biggest banks now dominate the research market as a result of MiFID II.
Furthermore, the challenge is complicated by the differing regulations in various jurisdictions. While the UK aims to free itself from EU restrictions after Brexit, EU member states are also seeking to reverse the unbundling rule. Meanwhile, US firms are still adjusting to the EU rules as a waiver for research charges expires.
The unbundling rule is just one component of the broader Markets in Financial Instruments Directive. The industry is advocating for additional changes, with experts highlighting the need for a comprehensive overhaul rather than addressing individual policy points. Despite the complexity, most stakeholders in the City of London welcome the proposed change, as the unbundling rule produced significant harm without tangible benefits.
Removing the constraint on research charges is expected to have positive implications for the stock exchange, supporting its plans for expanding access to equity markets and equity capital raising. Alasdair Haynes, CEO of London's Aquis Exchange, believes that this change will particularly benefit investors interested in growth companies. Clark Nicholls, from AXA Investment Managers, suggests that harmonizing regulations by eliminating equity research payments in the UK makes sense.
James Orme-Smith, CEO of Sandbar Asset Management, views the reversal as a net positive for the industry, as the previous rules unintentionally resulted in the attrition of talent from the sell-side. However, even if the rule reversal is seamless, the research business is unlikely to return to its former state. A broader reform or additional measures may be necessary to address the long-term decline of research.
One possibility raised by the UK's review is the creation of a portal to improve accessibility to research for a wider user base. The division of research expenses from trading costs triggered a decline in the value buy-side shareholders were willing to pay for information. Steven Fine, CEO of Peel Hunt Ltd, applauds the proposed reform but believes that more changes are needed to enhance competitiveness in the industry. This reform, along with other potential measures, could have a far-reaching impact on the financial sector.