I was hoping to enjoy the last few weeks of summer in relative peace, but it seems that another regulatory storm is brewing. This time it’s over the unbundling of research and it all stems from ESMA’s interpretation that, under MiFID II, research is an “inducement to trade” and therefore cannot be paid for out of commissions. This threatens to completely derail the economics of trading and reduce the quantity and quality of research available (and the resultant investment decisions). The current approach allows for research and other legitimate broker services to be paid for out of dealing commission and is managed and controlled via commission sharing arrangements (CSAs). Provided the right systems are in place the buy-side can evidence all of their decisions as to where commission dollars were spent and the sell-side can be adequately rewarded for providing quality research – the better the research it provides, the more commission dollars it attracts.
I wonder if a better approach, then, might be to ensure the whole CSA process is standardised and works properly, since everyone seems happy with it. Otherwise, we will face the worst possible outcome. Firms will have little incentive to invest in proper CSA management systems today if they believe that everything will eventually be fully unbundled. This will do little for industry efficiency and seems to fly squarely in the face of any regulatory objective of transparency. And, at the same time, the whole of the European investment industry will be placed at a competitive disadvantage as the unbundled ‘sticker price’ of their services will appear much higher than that of their competitors in the US or Asia.