One of the big questions asked in the finance industry is what will happen with investment research once MiFID II becomes applicable. This is because the revised Directive on capital markets and financial services imposes stringent conduct of business rules and obligations.
Inter alia, the new rules of MiFID II require professionals providing investment or portfolio management services to act ‘honestly, fairly and professionally in accordance with the best interests of the clients’ (Article 24(1) MiFID II). Under this overarching principle, MiFID II includes research costs, for which fund managers and professionals will either have to pay from the firm’s own resources or from the Research Payment Account (RPA), charged directly to the client (Article 24(7) and (8) MiFID II).
According to professionals, this will trigger a decrease in research activities. Although such a decrease was part of the aim [1], stakeholders argue that it will go further beyond the purpose of Article 24 MiFID.
In particular, research for equity investments in small cap businesses is deemed to be at risk because this field had already been in decline for some time. David Wighton weighs the differing opinions in his article ‘The Effect of MiFID II that Everyone Has Misjudged’ to prove that it is an exaggeration to forecast ‘the death of small company research at the hands of Mifid II’ since besides brokers who have devised ways to provide free research to clients, the burden may also shift to issuers or to market operators of equity trading venues (which is an ongoing trend).
One advantage is certain: bias in substantiating investment advice will be drastically reduced since MiFID II unbundles the fees applied to investors, prohibits commission-sharing and forces more cost-transparency for clients.
[1] According to Verena Ross, Executive Director of ESMA, ‘[t]his should help ensure better use of the research budget instead of firms (and ultimately their clients) paying for low-quality, duplicative research. Managers will thus be able to use more efficiently and wisely the funds allocated to research’ – extract available here.