compliance puzzle

Regulation requiring asset managers to pay for research directly, rather than bundling it with brokerage business, has improved asset managers’ cost sensitivity and saved millions for investors, according to a review by the U.K. Financial Conduct Authority (FCA).

A regulatory review of the impact of research unbundling rules, which were adopted in January 2018 as part of the Markets in Financial Instruments Directive (MiFID II), finds that the measures are paying off for investors, the FCA says.

Among other things, the review found that most asset managers have chosen to pay for research from their own revenues instead of charging clients.

“Firms have also improved their accountability and scrutiny of both research and execution costs, including where firms have chosen to charge research costs to clients,” it says.

As a result, investors in U.K.-managed equity portfolios saved an estimated £70 million in the first six months of 2018, across a sample of 40 firms.

The FCA has estimated that, overall, investors will save about £180 million per year due to the unbundling requirements.

Based on the actual savings found in the review, it says that “this is likely to be a conservative estimate.”

With firms paying for research costs themselves, research budgets have dropped by 20% to 30%, the FCA notes.

Yet, it says firms report that they are still receiving the research they need. The regulators also found that small companies have not seen a material drop in research coverage.

Pricing for research is still evolving, the review noted.

Additionally, the review found that best execution and order routing are improving, and that fewer brokers are being used for both research and trade execution.

“Unbundling has reduced conflicts of interest for asset managers when they choose which counterparties to place or execute orders with, allowing asset managers to select brokers based purely on their ability to provide best execution,” it says.

The regulators say they haven’t found any evidence of asset managers making hidden payments for research through inflated trading commissions.

The FCA says that it will continue to monitor the ongoing impact of the rules on research coverage and competition.

It’s planning further work in this area in 12 to 24 months’ time to assess firms’ ongoing compliance.