Unbundling investment research under MiFID II: How to balance price, allocation and quality

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MiFID II, with its sweeping reforms to financial markets and business practices, is revolutionising the way in which investment research is produced and distributed, with implications for transparency, performance and competition. Despite the one-year delay in implementating the rules, there are still significant challenges and concerns that need to be addressed: different interpretations by different EU national competent authorities (NCAs), different rules in other jurisdictions, uncertainty regarding the dividing line between research and minor non-monetary benefit.

Moreover, the various additional requirements that firms have to comply with in order to use a research payment account (RPA), will make it easier for them to absorb the cost of research through their P&L (profit & loss) account and modify their cost structures by increasing portfolio management fees. These factors may give US asset managers a significant advantage over European managers in terms of size and flexibility of research spending.

In addition, the widespread move to P&L in Europe has reduced research transparency (P&L managers have no regulatory obligation to report research spending, unlike managers using client money), while it is likely to increase risks for asset owners. Last but not least, concerns were also expressed about poor coverage and liquidity of small and mid-cap companies, which would have an adverse effect on the cost of capital and the ability to raise capital or list on the market.

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