FCA unbundling heralds move to explicit research pricing – The TRADE Poll

Buy-side traders expect sell-side research will be explicitly priced in the future following the Financial Conduct Authority’s consultation on bundled payments for research, according to the theTRADEnews.com’s latest poll.

Buy-side traders expect sell-side research will be explicitly priced in the future following the Financial Conduct Authority’s (FCA) consultation on bundled payments for research, according to the theTRADEnews.com’s latest poll.

The FCA has made it clear in its consultation paper that it wants asset managers to take more care over how they use client funds to pay for research.

While a significant minority of 44% of theTRADEnews.com readers felt that the review would lead to explicit research pricing, there was disagreement among the sell-side over whether this will be the eventual outcome.

“I’m not sure that we’ll necessarily see explicit pricing on research, but the key part of the FCA’s consultation paper is that asset managers will only be able to use commissions to pay for execution and substantive research,” said Andy McNally, head of broker Berenberg UK.

“The biggest challenge for asset managers is to justify that the research is substantive and adds value.”

However, Rob Boardman, CEO of agency broker ITG, said the FCA’s text clearly mandates the explicit pricing of research.

“What the FCA wants to see is investment firms setting out in advance how much they will pay and what research they expect to receive for that money,” he said.

Perhaps the most worrying expectation, for the sell-side at least, is that over a third of respondents believe that brokers will exit the research and/or execution business as a result of the changes to the way commissions are used.

Many industry commentators have complained that the research market has significant overcapacity at present, with many lackluster research operations propped up by the current bundled payments model. Similarly, independent research houses that might struggle to bring in business when they aren’t able to simply tack their work onto an execution commission could also benefit.

Boardman believes local brokers in the UK will be the hardest hit initially, but expects this to spread as it gains international attention.

“There is likely to be pressure on revenues once these rules are introduced, but this is only in the UK at present so it’s not going to have a big impact on the international brokers. However, we would expect other jurisdictions in Europe to follow this lead and this is also something that US regulators have been steadily chipping away at for several years,” he explains.

McNally said firms with scale are more likely to be able to cope with the new rules.

“If you offer too narrow a research product, focused on one country or sector, then you’re going to find it difficult to offer the kind of substantive research that buy-sider firms want. It’s also vital to have a solid execution offering to go alongside quality research,” he added.

A relatively small percentage of respondents, just 13%, felt this would result in higher costs for end investors.

Boardman believes that, eventually, the FCA’s work on unbundling will cut costs for end investors: “I don’t think it will cost more for end investors as this should make the industry more efficient. At the moment a lot of research is left underutilised and unread but it still gets paid for and the end investors is bearing that cost.”

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