The Financial Conduct Authority has predicted the Markets in Financial Instruments Directive (Mifid II) will save UK investors £1bn over the next five years, hailing the rules as a "major piece of post-crisis regulatory reform".
In a speech at the European Association of Independent Research Providers yesterday (February 26) Andrew Bailey, chief executive of the FCA, said Mifid II had already had a positive impact on the cost of research in the market.
The unbundling of research costs was a component of the Mifid II rules introduced in January 2018, which requires financial services firms to disclose a breakdown of all costs and charges associated with a client’s investments on both a forecast and actual basis.
Mr Bailey said the regulator estimated the reduction in charges for investors in UK-managed equity portfolios was around £180m in 2018.
"Assuming similar savings going forward, this equates to nearly £1bn over the next 5 years," he added.
The regulator said since last summer it has been carrying out a multi-firm review of buy-side asset managers, sell-side brokers, and independent research providers, with its findings suggesting research budgets had reduced by 20 to 30 per cent.
Mr Bailey said: "Most notable has been the shift by a vast majority of traditional asset managers to 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 buy-side firms would continue to charge clients for research.
"The market is going through a period of price discovery, and is probably yet to find an equilibrium."
Concerns have previously been raised that the Mifid II rules have caused a "shakeout" of small and independent research providers in the investment industry, most recently voiced by the CFA Institute earlier this month.
But Mr Bailey said the evidence seen by the regulator so far had been "inconclusive", and did not suggest the "dramatically negative impact" on the research coverage of smaller companies that some had predicted.
Mr Bailey acknowledged pricing was a "sensitive topic" and promised the regulator was keen to scrutinise competition questions raised by low research pricing in the market.
He added that overall the FCA considered the Mifid II rules to be already having a positive impact on the sector.
He said: "We are seeing changes in behaviour which are starting to deliver the intended effects – reducing conflicts of interest, improving accountability and producing cost savings for investors.
"It is also clear that the market is still evolving, and that we quite likely have not yet found the right pricing equilibrium for research – or felt the full benefit of competition – in a market which was previously characterised by opaque pricing and weak competition."
Mr Bailey said the new framework is designed to "increase accountability" but must rely on competitive market for research to be fully effective.
He added: "Competition creates 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."