The recently released Euro IRP Member Study revealed a number of key findings, including unanimous support for the FCA’s proposal to exempt independent research providers from MiFID II inducement rules.
Top Findings from 2021 Euro IRP Annual Study
The most important development for independent research providers in the past year was the FCA proposals to exempt independent research providers from MiFID II inducement rules. 100% of the Euro IRP members who participated in this year’s survey support this proposal, with 94% believing that Continental European regulators should follow the FCA’s lead on this issue in an effort to level the playing field. 71% of all survey participants believe such a move will directly benefit their own business.
The FCA also proposed to exempt MIFID II mandates for FICC research and for research coverage of SMEs with a market cap under £200 mln. 87% and 86% of Euro IRP members agree with these proposals, respectively.
One in three IRPs surveyed says they currently have a research product they define as ESG, though approximately 42% of the IRPs surveyed say they are looking to develop their business by expanding their ESG coverage. This compares to approximately 38% who said this in 2020 and 22% who said this in 2019. Two thirds of IRPs see ESG as either a ‘must have’ service or a growth opportunity – and as we will see shortly, ESG is seen by IRPs as the number one business opportunity going forward.
For 2021, for the market overall, the outlook is notably more positive, with over 72% of respondents somewhat or very much more positive, compared with 69% who took the same view last year. It is interesting to note that the percentage of respondents who were very positive about their business prospects in the coming year hit 22% — the highest level seen for this question in the past 4 years.
According to survey participants, revenues continue to hold steady for IRPs, with 80% level year on year, 9% up, and 11% down. Behind the headlines, smaller IRPs are facing the biggest challenges to sustain revenues and clients.
Neither the ongoing challenges of the pandemic, nor the uncertainties of Brexit, appear to have unsettled IRPs. All have adjusted well to the new ways of working, with 66% of IRPs reporting that Covid has had none or only a marginal impact on their business practices, and similarly for Brexit.
The percentage of IRPs who believe that urgent regulatory action is needed to address predatory pricing by the investment banks has risen to 78% – the highest level seen for this question in three years. Although some IRPs feel a bottom has been reached on research pricing, still 45% of IRPs are experiencing declining research pricing, for the fifth year running. Over 80% of the IRPs surveyed believe the buyside – especially the globals and larger players – are exploiting MiFID II rules to drive down pricing.
The average mean annual price per client for an IRP’s service is US$22,500 , with the average median annual price per client at US$20,600 – both numbers are down about 8% on last year, endorsing the overall pricing sentiment from IRPs.
According to survey participants approximately 30% of IRPs are seeing buy-side research budgets fall 10% or more in 2021. This compares to almost 37% who saw comparable drops in research budgets ion 2020, and close to 57% who saw similar research budget declines in 2019. While most IRPs are not seeing huge research budget increases, approximately 24% of survey participants are seeing some modest increase in research budgets in 2021. This compares to 15% who saw research budget gains in 2020, and approximately 5% who saw rising research budgets in 2019.
Our Take
The 2021 Annual Euro IRP Member survey reveals that market conditions for IRPs in Europe, while not bullish, are improving modestly as buyside research budgets are finally stabilizing and the FCA is finally admitting that IRPs should not be held to the same standard as investment banks with regards to the MiFID II rules surrounding inducements. Unfortunately, this does not mean the regulators have addressed the problems that cross-subsidization by investment banks has created for IRPs. However, the difficult conditions that most IRPs have faced in the past few years seem to be improving slowly.