Rules on research unbundling introduced under Mifid II saved investors at least £70m in the first half of last year, according to the financial regulator.
Mifid II was introduced in January 2018 and requires asset managers to pay for research separately from execution services, either charging clients transparently or paying for research themselves.
In a review of the new rules published today (September 19) the Financial Conduct Authority found "broadly positive changes" in the behaviour of firms in response to the unbundling reforms, including reduced conflicts of interest for asset managers when they choose which parties to place or execute orders with.
The regulator reviewed 40 asset managers and five independent research providers between July 2018 and March 2019, finding most traditional asset managers had chosen to absorb research costs themselves and reduce their expenditure.
As a result, based on its sample alone, the FCA found investors in UK-managed equity portfolios had saved around £70m in the first half of last year, compared to the same period in 2017.
In February Andrew Bailey, chief executive of the FCA, predicted the reforms would save investors £1bn over the next five years.
The regulator's survey found budgets set by firms for externally produced equity research had dropped by 20-30 per cent, with the FCA partially pointing to competition driving down costs for written material.
The FCA said: "Unbundling has reduced conflicts of interest for asset managers when they choose which counterparties to place or execute orders with, allowing asset managers to select brokers based purely on their ability to provide best execution.
"We found no evidence of asset managers making hidden equity research payments through inflated commissions for trade executions as execution-only commission rates agreed between asset managers and brokers were largely the same or lower."
Whilst the regulator was largely complimentary of the industry's implementation of the new rules the FCA said it was clear research valuation and pricing was "still evolving".
There had been concerns ahead of the rules being implemented that they would lead to some sectors not being covered as widely by analysts - particularly among small cap companies.
But the FCA said: "Our own analysis indicates limited change in single-stock analyst coverage levels for smaller-cap listed UK companies since Mifid II was implemented. Trading volumes or spreads for UK Alternative Investment Market-listed companies, which can indicate reduced liquidity or investor demand, also do not appear to be affected."
The FCA said it found a wide range of sell-side research pricing levels, which it attributed to an "ongoing process of price discovery" and the fact a market for separately priced research was "still emerging".
The regulator said: "We will monitor for potential competition concerns in this market and will act if necessary.
"In some cases, firms have been uncertain in how the new rules apply, such as when attending trade association events, marketing research services or making contributions to consensus forecasts. We have clarified our expectations in these areas in our feedback."
The FCA said it would revisit work in the sector in 12 to 24 months time.
rachel.mortimer@ft.com
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