LONDON (Reuters) – New European Union rules to make the cost of stock and bond research more transparent are saving millions of pounds for investors and have not materially cut coverage of smaller firms, Britain’s Financial Conduct Authority (FCA) said on Thursday.
The EU rules, known as MiFID II, were a major reform for securities markets.
“The FCA finds MiFID II research unbundling rules working well for investors,” the watchdog said following a review of the rules.
Since January 2018, asset managers have been required to pay for research separately from execution services, and either charge clients transparently or pay for research themselves.
Before the new rules were introduced, the cost of research was typically bundled into opaque fees for executing trades that were borne by investors’ funds, giving asset managers less incentive to check that research was providing value for money.
The FCA said most asset managers have chosen to pay for research from their own revenues, instead of using their client funds.
“This has resulted in investors in UK-managed equity portfolios saving around 70 million pounds in the first six months of 2018 across a sample of firms,” the FCA said.
“Today’s long-awaited supervisory findings are positive for firms and consumers alike,” said Andrew Strange, director of financial services regulatory insights at consultants PwC.
But it was clear that models used for assessing the value of research were too inconsistent and needed refinement, Strange said.
Budgets for research have fallen on average by 20% to 30%, but coverage of smaller companies has not seen the reduction so far that some in the market had predicted, the watchdog said.
The FCA will check over the next two years for ongoing compliance with the new rules that have been introduced into UK law as Britain prepares to leave the EU next month.
Binit Shah, director at accountancy and advisory firm BDO, said research teams at banks were still absorbing the “pain” caused by implementing the EU rules.
“Whilst analyst coverage of mid- and small-cap stocks has naturally contracted over the last 18 months, historically this has been an unprofitable part of the market for analyst coverage,” Shah said.