On 3 January 2018, the long-held practice of blending research and execution charges into bundled commission rates will come to an end as MiFID II takes effect in Europe. Though regional in its proposed application, it is becoming increasingly clear that the implications of the new regulations will extend well beyond European shores.
Since releasing our first report on research unbundling in August 2016,1 we have seen a number of key developments on both the buy- and sell-sides as the industry prepares itself for regulatory go-live. Yet, despite the progress that has been made by brokers and fund managers to- date, we are starting to see growing signs of panic as players on both sides begin to digest the sheer scale of implementation challenges that lie ahead in the coming 9 months.
Our predictions last year on the outlook for the sell-side are starting to materialise, with global tier-2 waterfront research providers (e.g. CLSA, Barclays) being pushed out of the market, and independent research houses growing in their influence. For the global tier-1 brokers, we are also witnessing some changes in coverage and distribution models, including a heavy investment in proprietary research portals.
However, we believe further rationalisation of research coverage is required, necessitating greater selectivity around carving out a competitive niche across products, sectors and/or geographies. A fundamental re-think to research pricing is also needed, given the ongoing divergence between broker and manager expectations.
On the buy-side, we recognise many managers are still scratching their heads over how to set and monitor their research budgets, and how the new research payment model will impact their fund pricing strategy. Most critically, a number of firms still remain woefully unprepared from an operational and compliance standpoint, citing a lack of regulatory guidance around the specific policies and processes that need to be implemented to be MiFID II-compliant, as well as an absence of manpower to execute their new obligations internally. Urgent preparatory action is required now, even though details for the implementation of the directive will only be transposed into national law by European national regulators by 3 June 2017 at the latest.