The FCA has put out what is likely to be its final set of guidance notes on MiFID2 before the new research rules come into force. Are you ready to act?
The big news from the latest note is that the FCA has (finally) recognised that for research to be sold to investors, there needs to be some allowance in the rules for free trial periods. These are now allowed, subject to quite strict constraints on them being limited in time, and requirements for the party receiving the free research to keep a paper trail documenting that it is purely a trial of the overall service (rather than a way of receiving a particular report of interest).
There is also some clarification of the status of “deal research”, which is now to be considered a “minor non-monetary benefit” when it is provided by any party connected with a capital raising exercise, rather than previously when the exemption was only granted to research paid for by the issuer.
Other than these minor liberalisations, though, the FCA has confirmed that it intends to implement a fairly tough version of the MiFID research rules – and the rest of Europe’s securities supervisors are highly likely to follow suit we believe. It has been confirmed that the rules apply to fixed income research as well as equity, that there is no safe haven for “sales notes”, and that in general, research needs to be bought and paid for, either from designated research payment accounts, or from the investment manager’s own P&L.
The only issue on which the supervisors have given any ground at all is on macroeconomic research notes, as long as they are made available to the general investing public. Never before have we seen a group of analysts so eager to claim that their work is a minor benefit of no real economic value!
Given how far along the road we are, it is surprising to us that we are still encountering firms of all sizes on both buy and sell side who have not yet got a MiFID II strategy. To have a full pricing plan, or to have identified a set of approved research vendors, is still the exception rather than the rule. We are hearing from investment managers that they intend to address the problem by looking at improving the quality and cost-efficiency of their internal research capability, but this has still not translated into coherent concrete action. Time is running out, guys …
In fact, the reactions we have seen so far generally involve a reduction in internal research capacity as some investment managers focus on cost. There is a indeed a danger at some houses that the risk taking atmosphere in the research department has become severely inhibited. Scared researchers are not good researchers. The only way forward is through constructing a positive vision.
What we are seeing, then, is an intense phase of the eternal battle between cost and quality when it comes to research. There are only three strategies available to investment managers
1) Shrink internal research capacity. This hardly seems the way to maximise one’s franchise in a competitive market…
2) Increase use of external research. This is an aunt Sally - no-one we've spoken to is taking this route
3) Do your research in a better way. This is where Frontline Analysts can help.
If you can get lower-cost analysts at the early-career stage, off-shore or near-shore, and those analysts are properly trained and overseen by City veterans, then IMs and banks can square their circle. We are the only firm offering that model. Get in touch to find out more info@frontlineanalysts.com