At first glance, the UK Financial Conduct Authority’s (FCA’s) recent proposal on re-bundling appears positive, as it aims to address the damaging impact of the Markets in Financial Instruments Directive (MiFID) II unbundling rules on investment research.
However, the market has evolved since the rules came into play, and it is probably too late to reverse the structural changes that have become ingrained post MiFID II.
Conversations we have had with our clients since the FCA proposal also corroborate this conclusion.
Key takeaways:
Asset managers have become more discerning about the value of research they consume from the sell-side. They have bolstered their internal research teams and increasingly leverage primary and alternative data to drive their decisions. This is unlikely to change.
Asset managers have put in place mechanisms to ensure compliance with unbundling rules. With the European Union (EU) still sticking with unbundling, managers may want to avoid the operational complexity that comes from maintaining different payment systems for the UK and the EU.
Finally, and perhaps most importantly, the dynamics between asset owners and asset managers have changed since MiFID II. With most managers absorbing the cost of research on their P&L, asset owners are used to not paying for research. Will they now agree to start paying for research post re-bundling? Seems unlikely.
For sell-side firms, this would mean the trend of shrinking budgets will likely persist, and they would have to continue to prove the value of their research to get paid for it.
