European fund managers have welcomed plans from Brussels to exempt them from paying a fee for research on bonds and small companies.
Brussels last week proposed a series of changes to its markets rules in an attempt to ease trading and help the region’s economic recovery from the Covid-19 crisis. These tweaks include allowing banks to combine the research and trading fees they charge asset managers when it comes to debt and small-cap stocks.
The move signals regulators’ acceptance that a separation between these two charges put in place in 2018 — intended to reduce conflicts of interest — has curtailed activity in some areas.
Historically, many banks and brokers had bundled the two services in equities markets, making the research free in return for encouraging fund managers to trade through them.
Since the advent of the Mifid II regulations, “unbundling” the two products has reduced fund managers’ research spending by as much as 30 per cent, according to UK regulators. As a result, banks and independent providers have been drawn into a price war to sell research and coverage of small-cap companies has declined rapidly.
The European Commission on Friday proposed to exempt companies with an equity market capitalisation of less than €1bn from the unbundling requirement, to encourage greater analyst coverage and thus trading in the stock.
It also put forward an exemption for fixed-income research. The costs for producing such research were never based on commission “so it does not pose a conflict of interest between brokerage and research”, the commission said.
Some fund managers have argued that they have historically paid for bond research through a wider bid/ask spread — the gap between the price at which an asset can be bought and sold.
The German Investment Funds Association, which represents German fund managers, backed the exemption for fixed income. “Asset managers pay currently twice for this type of research: once within the spread and secondly directly,” it said.
The association added that the planned €1bn threshold for equities seemed “too low” as it estimated the restriction would apply to only half of the 70 companies in Germany’s small-cap stock index.
Steve Kelly of Euro IRP, a trade body for European research providers, said it was a return to “pre-2018” market practices for fixed-income trading. He said the changes represented EU policymakers’ attempt to kickstart an economic recovery, after the recovery package agreed last week.
“It would not make sense to inject €750bn into the economy, only to see that money aimed at [smaller companies] being hampered by excessive regulation,” he said.
But the proposals, likely to come into effect next year, have concerned some investment banks, which will be subject to separate rules in the US, Europe and the UK, which is planning to follow the original Mifid II regulations.
The UK had also been one of the biggest proponents for tough distinctions between analyst research and trading and has spoken of the “positive impact” of the rules.
The Association for Financial Markets in Europe, a body that represents banks and investors, has opposed making further changes. “Our position that introducing a bespoke research regime for some businesses could add further regulatory complexity and other drawbacks still stands,” a spokesperson said.