Industry Welcomes Esma Changing Research Stance

Terry Flanagan

Larger asset managers will be relieved they are allowed to continue to charge clients for research after European regulators softened their stance on implementing an outright ban on the practice said Berenberg, the German bank.

In May last year the European Securities and Markets Authority proposed that asset managers should bear the full costs of research and be banned from paying for research out of client commissions in its consultation on the revised rules covering trading and fund management in the region.

Pras Jeyanandhan, an analyst at Berenberg, said in a note: “This debate very quickly emerged as one of the most significant regulatory risks facing the industry.”

Berenberg had estimated that it would cost fund managers between £1bn and £1.5bn to buy research in the UK which would reduce their profitability by between 20% and 30%. In their responses to the Esma consultation paper, asset managers had also said the measure would put European firms at a disadvantage to US and Asian rivals and force many smaller firms to close.

Last month, in its final technical advice on the implementation of MiFID II, Esma said it will allow fund managers to buy research either with direct payments out of their own resources or from a separate research payment account which can be funded by a specific charge to the client.

“The latter is an important provision, and will likely be the more manageable option for the vast majority of asset management companies,” added Jeyanandhan.

However Berenberg also said the new proposal will still bring significant changes and the cost of research will come under more scrutiny. Clients will have to agree a research budget which cannot be breached without their approval and any surplus must be either rebated to the relevant funds or offset against future research budgets.

“New systems, processes and controls will need to be implemented, which will pose significant operating challenges,” said the analyst. “While this will be a burden, the larger asset managers are reasonably well positioned and will be relieved that they are still permitted to re-charge research costs to the client.”

Daniel Godfrey, chief executive of The Investment Association, which represents UK investment managers, said in a statement that the group supported Esma’s new proposal which will reduce conflicts of interest and ensure research payments are clearly separated from payments for trading.

Godfrey said: “A key part of the advice proposes the mandatory use of a Commission Sharing Agreement (CSA) between asset managers and investment banks.”

The association is developing an enhanced model CSA with an international law firm which will be available throughout the EU in the first quarter of this year.

Ashurst, the law firm, said in a briefing note that the administration of research payments can be delegated to a third party, so there is still a role for aggregators.

“Disclosure of the way in which the monies in the account are used must be provided to clients, both in advance (in general terms) and (more specifically) periodically after the event,” added Ashurst. “So aggregators may have a role to play in this regard too.”

Esma is expected to finalise the MiFID II regulations this year after receiving industry comment before they become effective on 3 January 2017.

Berenberg said: “While the Commission can still choose not to endorse certain acts, we now see the guidance as relatively firm.”

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