During a panel hosted by the Association for Financial Markets in Europe (AFME), panellists explored existing developments on investment research in the EU and the UK as part of the respective EU Listing Act and the UK Investment Research Review.
In July, the UK Government announced that it had accepted recommendations from the Investment Research Review under the Edinburgh Reform, paving the way for a new ‘Research Platform’ that will provide a one-stop-shop for firms looking for research experts.
The accepted review also set the path for potentially removing the unbundling rules – an inherited EU law under Mifid II that requires brokers to charge a separate fee for research.
The reversal came as part of efforts to boost the attractiveness of the UK’s financial services sector in what could potentially be the latest divergence in regulation from the EU following Brexit.
However, panellists noted that developments in research rules should be more focused on convergence rather than divergence, to ensure research proposals benefit financial markets at large.
“I think of research as the global golden thread. Of all the bits of the financial markets, it is the one that seems to penetrate most globally. An analysis in any one jurisdiction can be read by investors in a whole variety of them,” said one panellist. “That means that when policy happens in one bit of the world, it can affect other parts, and we’ve seen that, of course, over the years with research.”
“The challenge for firms and for associations like AFME is to try to pull together the global elements of that golden thread into coherent policy work,” added another panellist.
The unbundling regulation, which was introduced under Mifid II, required firms to separate the cost of investment research from trading costs – with the aim of increasing transparency and reducing conflicts of interest.
However, it has been suggested that the move across Europe has led to a lack of competition in the research market, with larger providers who are able to subsidise their research department being favoured. Other knocks against the rules claim that unbundling reduced research coverage, quality and the number of analysts, as well as denting liquidity in certain stocks.
“Regulatory alignment is key for us to change anything around our processes. It’s very difficult to operate with different regulatory regimes in different geographies when you’re trying to look at an overall operating model globally,” noted one panellist. “Anything that the regulators can do in terms of aligning views, policies, rules, et cetera would be massively helpful.”
The EU Listing Act, which was announced soon after the UK’s Investment Research Review, also included proposals for a research marketplace or research platform – suggesting some sort of convergence between the two jurisdictions.
The proposals aim to provide a central facility for the promotion, sourcing and dissemination of research on publicly traded company and potentially open to all, but in particular for smaller companies.
“This regulatory fitness exercise that has been taking place in the EU, like in the UK, whereby our policymakers have been scanning through market evolutions and addressing the potential shortcomings of our current legislation, is absolutely key to keep rules relevant and fit for purpose,” added a panellist.
Elsewhere in the discussion, panellists emphasised the importance of keeping an eye on the detrimental effect these new proposals could have on execution quality and cost.
If rebundling were to occur and brokers tended to favour someone who chooses to bundle versus someone else who choosing to maintain a split between execution and research, this could increase cost for intermediaries and therefore the cost for an investor.
“Certainly, what we do not want is less focus on execution, which is something that we gain from the unbundling rules,” noted a panellist.
Panellists highlighted that as much as possible, regulators and authorities should be encouraged to introduce a simple, workable, non-complex change in regulation and postpone any other policy development work until the impact of that change can be assessed.
“[Whatever] platform is developed should be designed to support the production of research on all the publicly traded companies, improve the research coverage, and also trigger more market interest in smaller cap companies and liquidity in their shares,” concluded one panellist.