Asset managers in France and Germany are pushing for a change to European rules on investment research payments, setting the stage for an early post-Brexit clash between UK and EU financial regulations.
The French and German investment trade bodies, which represent fund groups that oversee assets of more than €9tn, have broken ranks with their counterparts in the UK to lobby for revamping the EU’s landmark Mifid II regulations.
Mifid II, which came into effect in 2018, forced asset managers to separate the cost of research from trading commissions paid to brokers, a process known as unbundling, with the aim of curbing inducements and conflicts of interests.
The rules are controversial, with critics arguing they have a detrimental effect on research coverage and quality, particularly for small and midsized companies. This debate has been reignited by the European Commission’s review of Mifid II, which paves the way for potential changes to the research rules.
Should the EU push ahead with an overhaul of the framework, it would place Brussels in direct opposition to the UK. Britain’s Financial Conduct Authority was the main architect of research unbundling and has broadly defended the effectiveness of the rules since they came into force, making it likely to retain the regulations once the UK leaves the EU.
The divergence in the attitude of continental European and UK asset managers to research unbundling is laid bare in their responses to the EU’s consultation, which closed last week.
Germany’s fund association, the BVI, used its submission to urge Brussels to “review the unbundling rules focusing on market practice, how research costs are allocated and [ensuring] appropriate research coverage” for small and medium-sized companies. According to the BVI, the main way to improve small companies coverage is to increase access to issuer-sponsored research, which can be distributed to investors for free without falling foul of Mifid.
The AFG, the mouthpiece for French asset managers, echoed this view in its filing. The association said that the new rules had “profoundly changed” the research landscape, leading to a decline in the quantity and quality of investment research.
It pointed to a recent paper from France’s financial watchdog, the Autorité des Marchés Financiers, showing that coverage of French companies valued between €150m and €1bn had declined by as much as 26 per cent. The AMF itself has been a vocal critic of Mifid II.
However, the UK’s Investment Association argued that the opposite was true, noting that the fall in the amount of research produced was mainly due to a reduction in duplication from different providers. The trade body added that it did not perceive “a material issue” with small and medium company research or a fall in the quality of research in general.
This position is supported by a new study by researchers at Columbia Business School in New York, which found that large-cap companies have seen a drop-off in coverage as fund houses became more selective about what research they need, whereas small-cap companies have not.
In their research, which is under consideration for publication in the Journal of Financial Economics, PhD candidates Yifeng Guo and Lira Mota conclude that Mifid II has improved the quality of research across the market cap spectrum because of increased competition among analysts.