RegulationNov 12 2014

Research and trading cost bundling ban set to be scaled back

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The UK markets regulator is set to fail in its attempt to introduce a Europe-wide ban on brokers bundling the cost of research with trading, according to a senior European politician, the Financial Times writes.

The Financial Conduct Authority is seeking to put an end to banks charging investors for research out of share-dealing commissions, and hoped to have a tougher regulatory approach included in Europe’s review of its securities markets legislation, known as Mifid II.

The regulator wants to separate these payments to reduce conflicts of interest, clarify the costs being incurred and ensure investors get a better deal.

Its move has been opposed by many banks and some large institutional investors. The proposed reforms have triggered warnings that London’s competitiveness as a financial centre could be put at risk by the changes, squeezing the profits of smaller asset managers and putting some small brokers out of business.

The European Securities and Markets Authority (Esma), the pan-European regulator, has been assessing the proposals. However, it has rejected the FCA proposals in favour of more transparency from brokers, according to Kay Swinburne MEP, Conservative co-ordinator for Economic and Monetary Affairs.

Asset managers in August told Investment Adviser of their condemnation of the proposals, which they said may lead to poorer returns for investors and significant damage to small and medium-sized enterprises (SMEs).

Currently, asset managers gain access to research from brokers and investment banks through paying slightly higher dealing commission when executing trades, receiving the research as a cross-subsidy.

The FCA had previously consulted on the subject and UK managers are scrutinised to make sure they do not over-trade, or ‘churn’, with a view to gaining access to more research.

But ESMA viewed the whole concept of commission subsidising research as an “inducement” and stated in its latest guidance on the Markets in Financial Instruments Directive (MiFID II) that it should be banned.

Vanguard Asset Management said its European business was unlikely to suffer significantly because it runs only passive funds and does not need to pay for research. But it said the proposal could “cause major disruption to well-established and well-functioning relationships to the ultimate detriment of investors”.

France-based Axa Investment Managers said the proposals were “not in the best interests of investors”. It stated that any such regulation would result in less research being published and was likely to lead to poorer investment outcomes for clients.

It also said asset managers would have to bear the increased costs for doing their own research, potentially driving some of them out of business and stifling competition.

Another fear is that asset managers will start to avoid SMEs – many of which rely on the capital markets for money – if access to research becomes too hard and too costly.

BlackRock said it was “not aware of evidence having been uncovered that research ‘induces’ portfolio managers to trade or to ‘churn’ or to agree higher execution rates”.