New technology is changing the nature of research for fund managers post MiFID II, according to the Financial Conduct Authority’s (FCA) chief executive.

Addressing the European Independent Research providers association yesterday, Andrew Bailey stated: “New technology is changing not only the nature of research, but how this is supplied, monitored and valued by the buyside.”

After coming into effect almost 14 months ago, the EU-wide regulation completed the long journey from bundled commissions to a framework that requires a clear separation by asset managers between execution and research payments.

MiFID II seeks to improve transparency, reduce potential conflicts of interest, and promote competition by unbundling brokers’ activities.

The most notable shift, according to Bailey, has been that a vast majority of traditional asset managers now fund research from their own revenues – instead of using their clients’ funds.

“The scale of this shift went well beyond our expectations in the summer of 2017, when surveys suggested two-thirds or more of buyside firms would continue to charge clients for research,” he stated. “In conjunction, there has been robust discussion around the value and price of research as an embryonic market place emerges – the market is going through a period of price discovery, and is probably yet to find an equilibrium.”

Bailey admitted that the new market competition MiFID II has created will inevitably lead to winners and losers – “this may mean some consolidation in parts of the market and, hopefully, new opportunities for those offering the best products and services”.

Since summer last year, the FCA has been carrying out a multi-firm review - including buy-side asset managers, sell-side brokers, and independent research providers - with findings suggesting that the new rules are having a positive impact on the accountability and discipline of the buy-side when procuring research, and on the cost of execution.

Dealing commissions have fallen – not only due to the removal of research costs, but also because managers are increasingly using more electronic, ‘low-touch’ channels. The work also largely confirms public reports that research budgets have reduced by around 20 to 30 per cent.

“Overall, we estimate that the reduction in charges incurred by investors in equity portfolios managed in the UK was in the region of £180 million in 2018,” said Bailey. “Assuming similar savings going forward, this equates to nearly £1 billion over the next five years.”

Addressing industry concerns, he noted that while the FCA cannot change baseline restrictions, “we have exercised flexibility in our rules where we can and we do intend to be pragmatic about this”.

He also noted that the European Commission has launched a study on the impacts of the MiFID II reforms on the research market.

“We are now completing our supervisory work to assess how the rules are bedding in, to analyse their impact on asset owners and consumers and, more widely, on the market for research,” added Bailey, explaining that more formal feedback will be provided in the second quarter of this year.

Henry Price, chief executive of FinTech firm Red Deer, commented that where investment managers have implemented legacy or non-compliant systems, or attempted to solve a problem manually, there is now a significant push to use technology to solve these problems effectively and efficiently.

“Research managers and their teams are being asked for greater business intelligence to drive the decision-making process, but there’s a fine balance to achieve between front office effort and quality of data, and effort on an overloaded back-office,” he said, adding that managers are looking for an unobtrusive ‘front-office first’ approach.

“Clients are increasingly looking to track corporate access management using similar tools to research interactions – we are still seeing the requirements for board and investor research reporting evolve as our clients start to see meaningful data from a year’s consumption.”

Share Story: