Last December, the European Securities and Markets Authority (ESMA) published its technical advice paper on payments for research. This follows earlier UK Financial Conduct Authority (FCA) consultations that caused shockwaves in the industry when an outright ban on using client commissions to pay for research, known as unbundling, was proposed.
Esma’s technical advice gives the buy-side a choice; either bear the full cost of funding research or impose strict conditions on the use of commissions for research, including the creation of research budgets and notifying clients about the approach adopted via a “ring fenced account”. The language stops short of demanding an outright ban on using client commissions and instead outlines the circumstances when it is permissible.
But Esma’s advice to the European Commission has effectively led to a standoff with the FCA, which recently waded back into the debate, publishing a paper arguing that ESMA’s draft does not permit the use of dealing commission to pay for research under any circumstances, including the use of Commission Sharing Agreements (CSAs). In addition, the UK regulator emphasised that, while it supports Esma’s position, it may drive the market to “hard dollars” for research, which could result in regulatory arbitrage that, in turn, might harm London’s standing as a financial centre.
Esma appears to have taken on board some of the industry’s concerns, highlighting the potential myriad unintended consequences of full unbundling. Forcing unbundling has been widely criticised as a solution in search of a problem. Concerns have been expressed that unbundling would result in a reduction in research coverage (particularly of small cap companies) and harm smaller investment managers, brokers and boutique, nonbank research providers.
Interestingly, Markus Ferber, the European Parliament’s vice chair of the Committee on Economic and Monetary Affairs was quoted by Bloomberg saying he is “not entirely happy” with the aspects of Esma’s proposals which would compel asset managers to unbundle research payments from payments made to brokers to execute trades. This would most likely affect these firms’ ability to access the capital markets – a counterproductive result, given the focus of European policymakers on encouraging investment in companies through the capital markets, as was recently highlighted in the Commission’s Green Paper on an EU Capital Markets Union.
It is now incumbent on industry participants to provide feedback ahead of the final ratification of the standards by the European Commission, which is scheduled to happen in the middle of this year.
On 31 March, this and other issues will be debated in a webinar hosted by The TRADE and Markit. Click HERE to register for the event to join the discussion.
Tom Conigliaro is managing director and head of investment services at Markit.