Will MiFID research arrangements change again?

I have been doing some informal polling on impact of the EU's latest proposed changes to the existing MiFID II Research regime across various forums in the last few days. As you probably know, these changes would create a narrowly defined exception authorising the joint payment for execution services and research on small-cap (defined as up to a market cap of a billion Euro) issuers and research.

The broad question I asked was "Will the MiFID Research changes as proposed by the EU make a material difference to market participants?". It is clear that the EU regulators believe it will be material, and there has been some positive press by a number of asset managers. However, based on the admittedly unscientific polling the real impact is not yet clear, with a very mixed response. Some of those polled said it would make a difference, whilst others said it would not, or indeed that it was too early to tell.

So what could be the likely impacts of these changes? For the large number of asset managers who are paying for research on their own account, there is a monetary benefit to aim for, assuming they can again pass the research costs onto clients by going back to the client funds model. There is also the argument that the MiFID II approach has reduced the depth of research on small caps, and that these changes could go some way to address. However, not all regulators are convinced on this second point, with the FCA finding there was no/minimal impact on small cap research in a study published in September 2019. Indeed with BREXIT looming and the FCA being a key backer of the current unbundling rules, there is potential, and as yet only potential, for divergence across the major European markets. This could be the reason behind why several of those polled specifically indicated that they thought there would be no UK impact.

Whatever the outcome, it is highly unlikely to simplify the mechanics of managing the research process - exceptions, even narrow exceptions - add to complexity. And so we continue to see major firms sign up for the products built with our alliance partners that have the necessary flexibility built in alongside the benefits of strong automation of the process.