The requirement to separate out the cost of research was one of the major headaches of MiFID II – and the recent move towards rebundling marks one of the biggest regulatory U-turns of recent years. But what will rebundling really entail? BEST EXECUTION and SUBSTANTIVE RESEARCH are joining forces to run an in-depth survey of both the buy- and sell-side to ascertain how they are responding to the key proposed recommendations, what will be most important elements to include in the new rules, and what the likely outcomes for the market will be.
Research rebundling has become one of the hottest topics of the year – a theme that is set to continue well into 2024. UK chancellor Jeremy Hunt’s Mansion House speech in July endorsed Rachel Kent’s UK Investment Research Review in its entirety, confirming plans to roll back MiFID II research unbundling rules, while similar changes are expected in the EU’s upcoming Listing Act.
The objective is to allow asset managers more flexibility in how they fund and pay for investment research. The hope is that they can go back to passing research costs onto their end investor clients, and that the amount of money that is spent on external research on SMEs and other asset classes will increase in volume and quality as a result. But will it really happen this way?
“This is a topic that has come up over and over again in our conversations with the industry this year,” said BEST EXECUTION editor Laurie McAughtry. “It’s keeping a lot of the buy-side awake at night, and we think it’s crucial to ascertain exactly what people are worried about, how they’re planning to respond, and what a rebundled world will look like.
“We occupy a unique position in terms of our access to the market, and we’re delighted to work with Substantive Research to utilise this platform in order to generate genuinely useful insights that the market can use to move forward.”
As of August 2023, a Substantive Research snapshot survey of 40 large buy-side firms found that although 85% would welcome removing external research costs from their P&Ls, they saw big obstacles to being able to do so, regardless of any regulatory change. Over 90% have no plans to make any chances until they see final details of the FCA plan (expected to be published by June 2024), while 85% said that even if the new FCA rules were aligned with EU reforms, they did not envisage being able to return research costs to their end investor clients… unless a number of their peers had done so first.
Is it a case of “who goes first” and if so, who is planning to take the plunge? And how will the new rules be enforced? The EU has provided few details so far, while in the UK it is clear that any response to the new freedoms will depend on the FCA’s detail and approach. Will the sell side be able to force the buy side to pay bundled? Will disclosure rules balance transparency and credibility with the risk of requirements being too onerous to implement? Is this an opportunity to change rules governing corporate access and allow payments to come from commissions once again?
How the buy and sell-side react to the new freedoms – and the extent of divergence between their approach – will dictate whether the goals of a more competitive UK listing market, more research on SMEs and higher quality research being incentivised are achievable.
PARTICIPATE IN THE SURVEY HERE
Covering a comprehensive cross-section of the financial services industry, including buy- and sell-side, providers, regulators, vendors, platforms and third-party contractors/research providers, the in-depth survey will explore insights from across the market to ascertain how firms plan to respond to the proposed recommendations; what they think will be most important elements for the FCA and EU to incorporate into the detail of the new rules; and what they think the likely outcomes for the market will be.
“With so much debate and rumour centering around proposed research ‘rebundling’, we’re delighted to work with BEST EXECUTION to find out what the industry really thinks will happen,” said Substantive Research CEO Mike Carrodus.
“This survey will help us all get an understanding of where consensus is right now. It will also be fascinating to see if differing expectations are driven by which side of the market you are on or how large your organisation is, or if it’s more about personal interpretations of the current situation.”
The survey will be open for responses until 24 November 2023, and can be accessed here: https://surveys.bestexecution.net/research-rebundling/.
A full write-up of the survey results will be released in a White Paper distributed across Best Execution and Markets Media platforms and included in Best Execution’s Winter magazine edition. To receive a copy, click here.
©Markets Media Europe 2023
