European Lawmakers and Regulators Oppose Research Commission Ban


European lawmakers and regulators have waded into the brawl over a potential ban on paying for investment research with client dealing commissions.  Members of the European Parliament (MEPs) are voicing concerns over harmful effects of a ban while French regulators directly challenged UK regulators’ interpretation of the proposed language as a ban.

Bloomberg reported that Markus Ferber, an influential European Parliament lawmaker, said he’s “not entirely happy” with regulators’ proposals that would force asset managers to separate payments for research from those they make to brokers to execute trades.  Ferber is a Member of the European Parliament (MEP) representing Bavaria, Germany and Vice-Chair of the European Parliament’s Committee on Economic and Monetary Affairs, which which oversees financial regulation.

Concerns over impact on SMEs

Ferber expressed concerns about shrinking research coverage in the wake of a ban.  While he felt guidance issued in December by the European Securities and Markets Authority (ESMA) moves in “the right direction” compared with an earlier draft, the measure “could still harm the coverage certain companies receive” from researchers.    This would be “counterproductive” as the EU tries to spur investment in companies through capital markets, he said.

“When it comes to equity research, our general goal should be to make capital markets financing easier, especially for small and medium enterprises which benefit most from equity research,” Ferber said. “We should bear in mind that too strict provisions on the treatment of equity research would especially harm SMEs.”

“This topic will certainly be discussed once more in the framework of the MiFID level-two process in the weeks to come,” Ferber said, referring to the procedure that will be used to agree on the technical rules.

Concerns over feasibility

The EU must make a full impact study of the proposals, Cora van Nieuwenhuizen, a Dutch member of the parliament’s Economic and Monetary Affairs Committee, said in an interview.

It makes sense for research to be seen as an inducement given to portfolio managers, and so covered by EU rules in this area, “but whether ESMA’s is the right approach, we have some worries about that — about whether it’s practical, workable,” van Nieuwenhuizen said.

One concern is the potential administrative burden for asset managers from setting up special research accounts, she said. Another is the potential impact on small businesses.

“It’s absolutely necessary that we have a proper impact assessment into what the effect will be on small stocks,” she said. “We don’t want investment in them to dry up completely, that would be a disaster.”

French Regulators Weigh In

French regulators have opposed a ban on research commissions ever since the UK Financial Conduct Authority (FCA) first raised the issue.  “We don’t see the ESMA technical advice as a way to completely forbid CSAs [Commission Sharing Agreements],” said Benoît de Juvigny, secretary general of the L’Autorité des Marchés Financiers (AMF), in a recent interview reported by the Wall Street Journal. “If CSAs are completely forbidden we are afraid, though we haven’t done any precise impact study, that it could increase the difficulty to finance research particularly for smaller companies where it is already difficult to find research.”

de Juvigny said the French believed the FCA’s view that CSAs were “incompatible with the intention of ESMA’s proposals” was a misinterpretation and that a revised form of the agreements would still be allowed.

Will Dennis, head of compliance at AFME, the main trade group for Europe’s investment banks, confirmed that some European regulators would not go as far as the FCA.   “If the FCA proceeds with [a ban] there will be an unlevel playing field across Europe,” he said.

Our Take

We noted parliamentary opposition to a ban last November when Kay Swinburne, another member of the Committee on Economic and Monetary Affairs, stated that MEPs “made it very clear to ESMA [the European Securities and Market Authority] that disclosure of the use of commissions is sufficient and banning of commissions should be off the table.”  Now two other MEPs on the Committee, including a Vice Chair, have expressed concerns about a ban. Nevertheless, there are sixty members of the committee including four Vice Chairs so three opponents do not necessarily speak for a majority of the committee.

Although French opposition is no surprise, but it confirms that the urgency of the debate.  The FCA made its position crystal clear last week and now opponents are marshaling their response.

We have been asked by asset managers and research providers about the probability of the outcome.  At this point, for the reasons we have articulated previously, we believe that it is probable that the final language will not ban the use of client commissions for the payment of investment research.  However, faithful readers will recall that we were originally skeptical that the FCA would ever go so far as embracing a ban.  In being wrong-footed by the FCA’s growing passion over this topic, we have developed a healthy respect for their mastery of the subject and  their success so far in steering the process in a direction they favor.  It will be a very close thing either way, and a lot of fur is going to fly before it is settled.



About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email:

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