Chris Turnbull, co-founder of ERIC (Electronic Research Interchange), comments on the unintended consequences of MiFID II:

Before MiFID II implementation many in the investment industry did the minimum necessary to comply with new unbundling rules. This bare bones approach didn’t give asset managers much time to assess the research they should be consuming and what it should cost. As the first quarter of life under MiFID II ends, a number of firms are about discover they owe more for research than they have anticipated and are not paying for it in the way the FCA intended.

Invoice shock

Asset managers that have negotiated a basic price for written research may be unaware of the full costs associated with broker interactions they previously took for granted. The heavily discounted prices of basic access that some negotiated will unlikely include conversations had with banks’ analysts in Q1 2018. Premium research takes many forms, of which time with top analysts is just one. Invoice shock may catch managers unaware as they slowly wake up to the true price of broker insight.

The return of broker voting

The focus in Q1 seems to have been on monitoring interactions, which suggests some asset managers are still using broker voting systems to determine who gets paid what for research consumed. This ex post approach to research payments is in direct conflict with the spirit of MiFID II. The industry may be struggling, or unwilling, to implement ex ante research payments, but we expect this to be addressed in the coming months. Regulatory intervention may be required.

No more trials

The FCA has allowed investors limited three-month trials of broker research content. Where research has been consumed in this way, such consumption will be coming to an end. Trials provided the industry with a convenient way to kick the can down the road while more pressing regulatory hurdles were addressed. The time has arrived for firms to decide which of these trials were valuable enough to convert to contractual agreements.

Where next?

Asset managers now have the opportunity to comprehensively evaluate their research usage under MiFID II. Analysis of a full quarter’s worth of data should reveal the external research output necessary for the job and the content – including premium analyst interaction – they can’t live without.

Arguments may arise around the fees due for research services. In some circumstances asset managers will need to re-evaluate how much they pay for research, which could reignite previous discussions over who should bear the costs. Three months on we may finally see the action that MiFID II has, to date, failed to inspire.