MiFID II Throwbacks: Party Like It’s 2017?


The following is a guest article written by Brijesh Malkan, Chief Strategy Officer at Singletrack, a provider of capital markets client engagement and analytics platforms

When I connect with Capital Markets professionals across the Sell-side, Buy-side and Corporate space there are two topics that are front of mind at present – the expiry of the SEC no-action letter that provides relief on MiFID II unbundling rules, and the role of generative AI within the advisory business (more on the latter in a future post).

As we start the conversation on no-action letter expiry, other regulatory activities underway in the UK, EU and Asia-Pacific enter discussions, and after a short while, there is a foreboding sense of familiarity – this feels a lot like 2017 all over again.

The scale of regulatory activity and market uncertainty are at levels not experienced since those last months before MiFID II came into force, occurring at a time of increased economic constraints and market consolidation.

So in this short post, we thought it would be helpful to summarise the regulatory activities underway, present some of our thoughts on how we expect things to play out and what actions Sell-Side firms can take to protect and grow revenue.

The table below presents a summary of the regulatory activities related to MiFID II that are currently underway.

UKFCAUK Financial Services and Markets Bill 2022Imple-mentedExemption applies to research on listed and unlisted issuers with a market capitalization below £200 million, where research is provided on a re-bundled basis or for free.
UKFCAInvestment Research Review (Edinburgh Reforms)In ProgressWill analyse interplay between research and the attractiveness of the U.K. as a listing venue. Rebundling will be considered. Will report within three months making recommendations for legislative and non-legislative changes.
USASECNo-action letter expiryJuly 3, 2023Will require U.S broker-dealers that receive or continue to receive “hard dollars” for research to consider alternatives. On February 21, 2023, SIFMA called for the SEC to extend the current no-action relief to allow broker-dealers to receive cash payments for research, referring to the potential for the MiFID II research rules to be rolled back since both the EU and U.K. are re-assessing the rules. Swedish Presidency proposed allowing bundling of execution and research.
EUSECEU Listing ActIn ProgressThe Commission has noted that EU MiFID II rules on unbundled research have failed to achieve all of their objectives. Extend exception to capture issuers with a market capitalization below EUR 10 billion. On 2nd May 2023, EC proposed removing any market capitalization limits “where separate payments may be too cumbersome”. Would still be subject to other EU MiFID II rules on conflicts of interest. AFME unconvinced on proposals.

The key takeaways from the initiatives are that we are seeing a scaling back of unbundling provisions, and while full rebundling may be some way off, the direction of travel is clearly heading towards less unbundling of research and advisory services (not more).

The implications of these changes are that while we operate somewhere in the middle of the bundled / unbundled continuum, additional changes increase complexity for market participants and require them to consider their operating models:

AreaImplications of current regulatory activitiesImpact
Research Payment MethodWe are unlikely to see significant changes in payment type. Those that have chosen to pay P&L will not go back to asset owners to ask for payment due to competitive and operational considerations. Those that pay via commissions will continue to do so.   In terms of method, firms are considering setting-up (or use existing) CSA / RPA structures to pay for services and reimburse clients (where P&L is the chosen payment method).Minimal
Assessment and ValuationWhile interaction based assessment and valuation has its drawbacks, it is an effective way of assessing quality and level of service and is now well embedded into processes.Minimal
Access to US ResearchTime is running out for a “Hail Mary” and while it may come, providers and consumers are making provisions to deal with the changes.   We expect research providers to either accept “hard dollar” payments via a EU / UK office or an RIA registered entity.   Some Buy Side firms may also consider setting up or using existing Research Payment Accounts (RPA) – either P&L or asset owner funded, to procure services.   Finally, some Buy Side firms may seek alternative solutions (such as Independent Research Providers and Expert Networks) for access to similar services.   Questions for Research Providers to answer on subsidisation of costs across different regions and payment methods.Significant
Additional Carve-outsRequires ongoing tracking of what falls in / out of market capitalisation and revenue boundaries.   Complexity of entitlements, valuation and payment.   Incentivisation of Analysts and Sales Professionals who now produce bundled content and services.Significant

So what should Sell-Side firms be doing now, and preparing for in the future to take advantage of increased uncertainty and relaxed unbundling rules? We have some thoughts on the opportunities available:

Productisation of Research OfferingDeconstruct research content and services into products to help manage carve-outs, while also taking advantage of regulatory changes to offer services to attract new clients.   In addition, Sell-Side firms are developing new offerings (e.g. data products) that fall outside of the unbundling rules and market uncertainty and deliver additional benefits to clients.   Finally, Sell-Side firms are also exploring ways to differentiate their research offerings to stand-out from the crowd – HTML5 research, multimedia and interactive content and Portals are some of the ways we are seeing clients capturing value from innovating their research products.Increase Number of Clients     Increase Revenue       Reduce Operational Overheads
Automated Entitlements ManagementLeverage technology solutions to manage entitlements and interests to ensure compliance with new rules (e.g. integrated market capitalisation data with product taxonomy)Reduce Operational Overheads   Reduce Operational Risks
Client Strategy Reporting and AnalyticsReview the client base with respect to revenue generation and consumption of services.   Understand which firms are consuming which types of research services (e.g. US equity research, small cap research etc.) and tie consumption to revenue risk and make decisions around servicing and editorial strategy.   Leverage data analytics to identify clients at risk faster (based on consumption or revenue trend changes).Reduce Revenue Risk  
Increased New Client ProspectingWith the carve-outs and relaxing of unbundling rules, there are more opportunities for firms that demonstrate their ability to deliver services that address Buy-Side fears around regulatory non-compliance.Increase Number of Clients   Increase Revenue
Distribution PartnershipsThere have been a number of mergers and distribution partnerships announced in recent months, and we expect similar trends to continue.   Sell-Side firms can expand their market share in new geographies with less regulatory uncertainty, or leverage operating models (e.g. RIA status or EU offices) to deliver US research in line with regulatory expectations.Increase Number of Clients   Increase Revenue

Overall, while the situation has increased uncertainty for all market participants, it has created impetus for firms to think differently about how they deliver their services and capture value.

Through the combination of business strategy, data analytics and workflow tools – the current changes can be leveraged to increase revenue, reduce operating costs and expand market share. It may feel like a throwback to 2017, but just like then, there is an opportunity for firms that are well prepared, to drive growth and business efficiency.


About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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