Disagreement Over Research Unbundling Between UK and EU Fund Managers
As part of the regulatory framework enacted by MiFID II in January of 2018, asset managers were required to separate the cost of research from other costs such as trading commissions. This separation – or ‘unbundling’ – of costs is one of the most controversial changes brought about by MiFID, with detractors stating that it unfairly advantages larger firms.
This controversy has been brought to light more sharply by the European Commissions recent review of MiFID II. As part of this review, citizens, NCAs and firms – particularly those from member states – were asked to make their feelings known about the efficacy of the regulations implemented as a result of MiFID II. The results of this review, which closed at Midnight on May 18th, have brought to light a clear divergence in opinion between the UK and the rest of the EU, leading to what The Financial Times has labelled a potential ‘early post-Brexit clash between UK and EU financial regulations’.
Prior to the implementation unbundling, the UK’s FCA (Financial Conduct Authority) was one of its biggest proponents. Other countries in the continental EU were more sceptical of the regulations, believing they would lead to a decrease in research quality.
The findings of the EC’s review of MiFID II have confirmed this scepticism. Fund managers in France and Germany whose assets account for over €9tn have used this review as an opportunity to push back against MiFID’s unbundling regulations.
The BVI – Germany’s fund association – has asked ESMA to ‘review the unbundling rules focusing on market practice’, as well as ‘how research costs are allocated’, particularly with reference to small- and medium-sized companies.
France’s AFG has mirrored this stance, arguing that the unbundling regulations put forward in MiFID II have led to a decrease in both the quantity and quality of investment research.
The UK, however, have argued the exact opposite. The Investment Association has claimed that any decline in research quantity is simply a result of unnecessary duplicate research not being produced by multiple providers. They have also claimed that no decrease in research quality has taken place as a result of unbundling.
The findings of the EC’s review have highlighted what could be the most significant post-Brexit change to European financial regulation. If Brussels accepts the arguments put forward by French and German fund managers while the UK holds fast to its present views on unbundling, we could see future clashes between the UK and ESMA’s European regulatory framework.
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