Earlier this week, Andrew Bailey Chief Executive at the FCA, gave a keynote speech at the European Independent Research providers association. During the talk, Bailey debates positive outcomes, challenges, and unintended consequences and concerns related to payments for research since the implementation of MiFID II.
Bailey provides useful guidance and clarifications for both the sell and buy sides on research unbundling and inducements, including (for the latter) the importance of robust valuation criteria, both prior to consumption and ex post. This assessment is purely subjective; as he states ‘value will mean different things to different people’.
The regulator’s focus with regards to research pricing was also explained; in particular, the scrutiny of low cost ‘all you can eat’ packages and low priced conferences which, the FCA believes, present a risk of conflicts of interest.
Bailey considers that the research unbundling rules have had a positive impact on accountability and discipline of buy-side firms, resulting in lower costs for investors. He confirms the consensus that the majority of buy side firms have opted to fund research from their own resources and emphasises the fact that the market is still going through a period of price discovery. The messaging is that the buy-side believes it has the (market) coverage that it requires, though competition concerns remain given the trend for reducing the number of providers.
Lastly, he highlights that the markets have evolved following the changes in the rules, but formal feedback is expected to be published later within the year.
Overall, the speech doesn’t provide any ground breaking insights; rather it underscores some important disciplines and areas of concern for the FCA with regard to artificially low pricing leading to the risk of conflicts of interest. As one of the most debated areas of MiFID II, it is an issue the FCA keep returning to. Firms should review their related governance arrangements through the prism of this speech.
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