Mifid II “has more significance than Brexit and Trump”, argued Darren Ellis, chief operating officer at London-based Zeus Capital, a boutique brokerage. “It changes the way the City works.”
Mr Ellis said brokers would be left in a difficult position: “I think the power will probably move even more so to the buyside, as they can decide what research they’re going to take.”
As much as two-thirds of the $30bn of commissions generated worldwide constitute research fees, according to Frost Consulting, an advisory firm specialising in regulatory compliance.
Although some fund managers, including Neil Woodford, have publicly stated they will absorb research costs, it is likely that many will seek to continue charging them to clients.
Executives at several broking houses, speaking on condition of anonymity, said that asset managers were proposing significantly smaller budgets for research. A study by Quinlan & Associates, a strategy consultancy, predicted a “decline in global research spend of up to 25-30 per cent by 2020”.
Reduced research payments could see brokers restrict their coverage of smaller businesses, according to brokers. Jon Gerty, head of regulation and compliance at Shore Capital, an investment group, agreed that Mifid II’s requirements were “likely to result in a decrease of available quality research, especially on small-medium enterprises, who rely on brokers to promote their shares”.
Mr Gerty said this, alongside other changes to market structure contained in Mifid II, could lead to liquidity in alternative markets drying up.
“There is a question whether regulators have undertaken a full and effective cost-benefit analysis of the potential unintended consequences of Mifid II, and the unbundling proposals in particular, on SMEs and their growth,” Mr Gerty said.
Although Mifid II is a European regulation, its impact will be global. A recent survey of more than 100 North American investment funds, conducted by financial technology firm Investment Technology Group, found that 82 per cent planned to fully unbundle research and execution payments to all their brokers.
The threat of the new rules has been known for some time, but it is only now that many groups are starting to make preparations.