Draft European Union (EU) proposals around the MiFID II
indicate that asset managers will be permitted to pay for sell-side research
through commission sharing agreements (CSAs) providing they give investors full
This announcement is a welcome respite to fund managers
who had feared CSAs would be banned altogether. “Every operational arrangement
for the collection of client research charge, where it is not collected separately
but alongside a transaction commission, has to indicate a separately
identifiable research charge,” according to the leaked draft, seen by Reuters. Other reports indicate market
commentaries or “non-substantive materials” from banks on economic statistics
or company results will have a clearer exemption from the MiFID II transparency
The leaked transparency obligations could require sell-side
brokers to clearly outline the costs of research to fund managers, something
which has long been called for. The draft proposal is a shift away from the
European Securities and Market Authority’s (ESMA) previous stance, which called
for a full unbundling of the cost of research and trading, in what could have
forced fund managers to pay directly for their sell-side research.
Forcing managers to pay for sell-side research could have
negatively impacted the P&Ls of research-dependent smaller managers, or led
to an increase in management fees. Other managers would have purchased less
sell-side research, which could have a detrimental impact on performance. The
most likely scenario of a complete unbundling would have resulted in managers
establishing pre-funded research payment accounts, fully paid for by investors.
The latter would have led to managers having to
renegotiate investor agreements, something which could have been problematic
for fund managers with thousands of accountholders. The legal fees would also
have been substantial, while there were question marks as to what would occur
if some investors did not sanction the research spend or if the research spend
went over budget post-agreement.
Others feared unsophisticated investors would be put off
by what they perceive to be ostensibly high research costs. A survey by
Deloitte of 13 investment managers with £475 billion in Assets under Management
(AuM) found 65% believed MiFID II’s clampdown on the use of equity commissions
to pay for research was their biggest challenge.
MiFID II was due to be implemented from January 2017, but it
is looking likely that it will be pushed back until January 2018. A number of
market participants were struggling with the technological and infrastructural
changes associated with MiFID II, particularly around areas such as transaction
reporting and other transparency obligations. A one-year delay was advocated by
a number of industry groups including the Investment Association (IA) and the
European Fund and Asset Management Association (EFAMA).
The impact of MiFID II on fund managers should not be
underestimated. Many asset managers routinely complain that the cost of
regulation is stifling their businesses. A study by The New City Initiative
(NCI), a think tank representing asset managers, found 46% of its members spent
10% and 20% of their management time dealing with regulatory compliance. 8 per-cent spent in excess of 20
percent of management time on regulatory matters, added the study - “The Next
Five Years: Regulatory Challenges which will Impact Asset Managers”. MiFID II
will undoubtedly add to this workload.