Falling research prices under MiFID II are leaving asset managers with a problem: the risk of being accused of taking inducements for cheap analysis.
The European Union’s regulatory overhaul will force buyside firms to justify the price they pay for analysis once its cost is unbundled from other services such as trading commissions.
With banks in the midst of a price war to try to grow market share, their clients could be blamed for accepting research costs that are so low they’re deemed by regulators to be inducements to attract other business.
“It’s not going to be easy — the onus is on the asset manager to decide what the research is worth and pay for the service we’re receiving,” said Jonathan Pitkanen, head of investment-grade research at Columbia Threadneedle Investments in London. “Prices are headed only one way, and that’s down.”
The rules are being put in place so that the analyst report with a clever idea will no longer act as an inducement to direct trades to the author’s firm. One potential way to avoid the restrictions is that research that’s publicly distributed won’t have to be paid for once the rules come in on Jan. 3.
Danske Bank A/S plans to take advantage of this by giving almost all of its fixed-income research away for free, while Credit Suisse Group AG will also distribute most of its output to institutional credit investors for no charge, people with knowledge of the matter said.
“If something is publicly available and widely distributed, that wouldn’t meet the definition of research under MiFID II,” said Claire Wallace, a London-based senior manager in the asset-management department of consultancy PricewaterhouseCoopers LLP.
A spokesman for the European Securities and Markets Authority, the Paris-based organization responsible for overseeing the new rules, declined to comment on what sort of research pricing would be considered an inducement. An official at the Financial Conduct Authority said the U.K. regulator would consider to monitor developments on pricing models, as well as inducement risks and competition issues.
Steve Strongin, Goldman Sachs Group Inc.’s global research chief, told a gathering of bankers recently that prices are tumbling because lenders care more about retaining client relationships than gaining revenue from their product, according to a summary of the event seen by Bloomberg News. Goldman did not immediately reply to a request for comment.
Deutsche Bank AG halved the price of its fixed-income and macro research to 30,000 euros ($36,000) a year for up to 10 users, according to people with knowledge of the matter. JPMorgan Chase & Co. proposes to charge $10,000 a year for read-only access to equity research, undercutting the 30,000 pounds ($39,000) Barclays Plc has proposed for a similar package.
Some banks have gone a step further by labeling some of their output as marketing communications, in the hope that they’re not liable to the ban on client perks.
Since 2011, Societe Generale SA has put a disclaimer on some of its reports stating “it is not appropriate to characterize it as independent investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a research recommendation.” A SocGen spokesman in London declined to comment on why the disclaimer was included.
Yet legal experts say that what matters is a research note’s content, rather than how it’s labeled.
“Investment managers have the obligation to assess the material they use and whether they need to pay for it,” said Owen Lysak, a partner in financial-market regulation at law firm Clifford Chance in London. “You might choose to put certain disclaimers on your research material, but that doesn’t mean that someone” covered by the rules “wouldn’t still think they need to pay for it.”
— With assistance by Grant Smith, Stefania Spezzati, and Tom Beardsworth