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Will MiFID II bring Evolution or Revolution to investment research?

There has been significant discussion, and indeed some confusion, around the impact of MiFID II on investment research. Some investment firms, including M&G recently, have made announcements that they will no longer charge the cost of broker’s research to the investor’s funds, but will pay them out of their own resources – a potentially revolutionary change. Others are saying that they will continue to operate in much the same way as today with only minor changes to their processes – adding up to, at most, evolution. So which is likely to be the dominant trend, how much will the world of investment research change, and how much is being mandated by regulation and how much is simply a change in market practice.

It has been commonly accepted that access to good and cost effective research is important for efficient asset management. Over the years investment firms, research providers and brokers have made extensive use of commission sharing agreements (CSA) to manage this process and to allow them to keep track of the research costs. However, the EU regulators and some in the market argue that this does not provide sufficient transparency of the costs to the investment firm’s client. Hence enter the changes being driven by the new MiFID II regulations, including the introduction of research payment accounts (RPA) and additional transparency requirements.

There are a number of different scenarios that are allowed under the new regulations, some apparently revolutionary and some more a kind of evolution.

At the revolution end of the spectrum is the hard cash only option. Under this alternative, an investment firm will not charge its customers for research and will only buy research as a direct cost. The impact will be a lower cost of investing for the customer and likely strong downward pressure on research charges from brokers and research providers, as well as a move to more use of independent research providers. However, if the downward cost pressure reduces the quality of the research provided, then the customer may lose investment return which could more than offset the reduction in research costs. Also not all firms will have the additional available cash to pay for this, or indeed their board/CFO may not view it as the best use of funds. They may argue that the hard cash option is a customer proposition alternative, rather than a mandated regulatory change.

In the evolution camp, the existing established CSA process will continue but at a minimum must be modified to satisfy the new RPA and allied transparency requirements, including agreeing the research cost element with the end customer.

Between these two extremes are a number of compromise positions. For example, where the customer is not charged for research, but the investment firm still uses its existing CSA process to monitor and manage the research costs.

So what is certain is that there will be change in the coming months. New processes and likely new systems will be required either for “revolutionary” cost management and control or for “evolutionary” valuation, management and transparency. Under either scenario there will be a sharper, more focussed assessment of whether the research consumed is worth its cost.



Comments: (2)

John Cant
John Cant - MPI Europe Ltd - London 07 July, 2016, 13:48Be the first to give this comment the thumbs up 0 likes

Given the sea change brexit vote since this was posted a number of people have asked whether the MiFID impact is likely to change - maybe some suggest there be delay or even an opt out for UK firms under MiFID. Well, the short answer is no - not likely. 

The longer explanation is that the MiFID II live date is within the two year period when we are still bound by EU regulation, also to do business in the EU as currently UK firms would have to comply with at least equivalent MiFID regulations and given the recent FCA announcement of regulation is business as usual, it is hard to see major changes to the research changes for MiFID II for UK firms.

I acknowledge that many firms would strongly prefer to avoid the pain that will come with a number of aspects of MiFID II whilst facing the Brexit challenges. There are also some other areas of the MiFID requirements have not been finalised. However, these are unlikely to cause delays - rather the regulations come into effect as planned but only the late defined parts have an extended bedding in period.

The best approach is surely to continue implementation programmes for research changes on the same schedule, but where possible build in the extra flexibility for change and more complex post EU exit models.

John Cant
John Cant - MPI Europe Ltd - London 07 October, 2016, 13:19Be the first to give this comment the thumbs up 0 likes

Helpfully the FCA’s recent announcement on MiFID II ( ), reconfirms the analysis above.

It clearly agrees that even the Evolution option will require process and system changes as stated above. In their latest paper they point out “Operationally, this will require changes to current Commission Sharing Agreement (CSA) accounts” and then indicate a number of conditions that need to be satisfied. They also confirm that the “hard dollar” Revolution option is consistent with MiFID II e.g. “direct payments by the investment firm out of its own resources”.

However, it still leaves the choice of where on the spectrum a firm wants to settle and how exactly it wants to satisfy the rules as being a choice for the firm. It also seems to be taking a different view from the AMF, the French regulator, which will further complicate decision making. We are seeing firms starting to be attracted to options which look at budgeting at a strategy rather than client/fund level. As the FCA notes this “may allow firms to set a budget at a desk-level or strategy level” but only if “the individual and collective portfolios subject to the budget share sufficiently similar research needs.” This may make budgeting easier but will still require a far more robust evaluation of research needs and how they are satisfied than exists in a good number of firms.

Whatever the potential approach, it is time to start implementation.