A Perspective on the Varied Responses to a Potential Ban


The following is a guest article summarizing reactions to the UK Financial Conduct Authority’s discussion paper calling for a ban on research commissions authored by Chris Turnbull, co-founder of Edinburgh-based Electronic Research Interchange (ERIC), an online marketplace for investment research.

Investment banks, brokers, independent research providers and asset managers all have different research agendas. For most, the research business model isn’t broken and shouldn’t be tampered with. The issue that is being overlooked by some, however, is that the UK regulators gave the industry free reign to self-regulate as long ago as 2006, and to all intents and purposes the industry has carried on down a path of self-interest, albeit with the opinion that the best interests of the end investor were being protected.

The industry adapted quickly to changes in trading technology with algorithms and internalisation showing that trades could be executed at a lower cost and more efficiently. This sped up the first wave of unbundling. It was apparent to all that execution could not justifiably be linked to research service. For the most part asset managers complied but there did remain some asset managers who carried on with dated processes. The water may have been muddied by the fact that fund managers with operations in various jurisdictions had different regulatory edicts to follow.

So we are now at a point where the industry can see that change is going to happen. The UK Financial Conduct Authority are not for turning and that coupled with the European Securities and Markets Authority’s stance as MiFID II approaches only  suggests that all should prepare for a brave new world rather than trying to stand in the way of the steamroller.

Business models across the industry are varied. Each asset manager has a different approach to research. Some are heavily reliant on, and pay a great deal for research and some able to take their research spend on to their own balance sheet.

Having spoken to a number of different interested parties, we can see that the arguments on all sides hold merit.

Some investment banks/brokers are well placed to proceed with menu pricing while others have concerns around their ability to price their product correctly.  There are some research providers that are explicitly pricing their research on their own websites at an individual report level however.

It’s a fine balance of keeping everyone happy. For those that currently ‘rebundle’, analysts may become more aware of how valuable their time is. Management will no doubt make them aware however that the infrastructure around them helps add to that value.

Investment banks and brokers take an approach of producing more research than is probably required but this helps provide fund managers with many different sources of research which  can lead to that stellar idea, generating performance for the end client. If an asset manager must pay for the research before it is consumed then such a moment might be missed.

Asset managers appreciate this. They do not see this point as an opportunity to drastically cut their research commission, rather they see this as a time to properly value and measure the commission consumed and reward it accordingly.

Some independent research providers (IRPs) have made the point that their asset manager clients are unsure of the future and have slowed payments. Asset managers fearful of research becoming a cost to the business rather than a cost to the client are clearly starting to monitor closely what they are paying for and why.  IRPs are used to having to scrap for every bit of commission they get, keeping costs to a minimum with the focus on the research, so lean times will not cast a shadow on their resolve. Becoming independent shows a belief in their product. The issue is getting the message across to asset managers in numbers.

The views of asset managers appear disparate but one side effect mentioned will be an ‘upscaling’ of the trading desk at firms where less resource has been pushed in that direction in the past. In some asset management firms, the influence of the fund manager on where to trade remains an implicit if not explicit factor. With fund managers ambivalent about where they trade, will there be a sharper focus on execution costs?

Chris Turnbull manages the Electronic Research Interchange (ERIC) which is a free marketplace where the sellers and buyers of substantive research meet. As services for investment managers are unbundled from broking commissions ERIC provides a transparent marketplace where these services can be sold and purchased.  Chris was previously an Investment Director at Standard Life Investments  and has worked latterly at Instinet and at ICAP BlockCross.


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