The unbounding exemptions for MIFID II have mostly to do with the costs of research services from asset management companies. Due to the very clear monetary difference between the services provided by EU and US-based managers, companies often feel cheated
or not obligated to provide the payment for services rendered.
To put it more into perspective, the average cost for an asset management company in the United States would cost investors around $10,000 while the very same service costs
around €30,000 in the EU.
This has mostly to do with the regulation governing the EU markets, thus allowing local companies to place this price on their services. And considering just how important it is to have all the latest research conducted in an industry as competitive as financial
speculation, both retail and institutional investors have no other choice but to pay.
However, reports have started coming in that large institutional investors are also starting to avoid or simply refuse payments for these services rendered, thus forcing asset managers to either bear the costs themselves or risk losing their largest clients.
Yes, that’s right, institutional investors usually utilize other services from asset managers, thus making them a very sought after client. Giving up €30,000 in the promise of retaining a €1,000,000 client, in the long run, may seem very enticing, but the
manager could forfeit its reputation in the process or directly violate the MIFID II guidelines.
When it comes to retail investors, there is news that some French clients have refused payment after finding out the massive pricing difference between EU and US-based asset managers. If we take a look at the
retail FX trading statistics in 2020 it does indeed provide some insight as to how many investors are ready to halt their trading plans just because they can’t receive a fairly priced
Although ESMA has addressed this to a point by
updating its Q&A section quite recently, the issue still persists and will continue doing so until the pricing issue is resolved, especially in the coming months as markets are believed to recover once major countries start re-opening their economies.
Small and medium-sized enterprises are the ones taking the largest hits from this pricing disparity. Due to their inherit smaller budgets compared to institutional behemoths, the €30,000 price tag on research is indeed too much of a stretch. It’s not like
they are risking to have a bit less in quarterly or yearly profits, but they risk not having profits at all.
This could be the same for relatively smaller banks as well, as they will not have direct access to market data, thus forfeiting one of the largest income sources and risking bankruptcy.
As for the fintech sector, it’s likely for companies adopting more and more modern technology, it seems that they have become slightly more independent in their back-end operations. Many mobile and internet banking platforms have reported that due to the
lack of costs for real-estate and manpower, they are able to continue affording research services from asset managers even if they come from the local EU markets.
Solving the issue
ESMA has not directly addressed this issue quite yet as the complaints made by trade associations are still fresh. But there seems very little that can be done in this sense until the numbers do indeed reach concerning levels.
The disparity in prices between two completely different markets is to be expected and accepted by most people. If the US is able to provide cheaper market research for its clients than the EU can, there are other sectors where the EU appears to be cheaper.
It’s a very tightly crafted balance that ESMA is unlikely to risk untangling.
But, if they were to try it, the most obvious sector to focus on would be the division of research costs. Putting all of the weight on the asset managers themselves would be pushing it a bit too much, but dividing the costs in a manner that can be agreed
upon by the two parties could potentially solve the problem.
Who will walk away unharmed?
It is not clear who will bear the largest cost from a potential adjustment of
MIDIF guidelines, but it’s very likely for the overall asset values to decrease in 2020. This is not necessarily due to issues dividing research costs, but the overall state of the global economy in general.
The largest danger, however, is facing asset management companies as there’s a risk of losing clients to personalized operations.