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Mike Carrodus, Substantive Research
Mike Carrodus, Substantive Research

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Regulatory uncertainty faces research provision

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Investment research providers have been rewarded for ploughing cash and resources into their offerings, but an uncertain regulatory landscape threatens to undermine their efforts, according to new research.

In a ranking of the top investment research providers in 2022 from analytics company Substantive Research, Jefferies has jumped from 7th position in 2021 to reach third place in the latest table.

The provider has ousted UBS to join Morgan Stanley and JPMorgan in the top three; a rise Substantive says follows significant investment by Jefferies in hiring and retaining skilled research analysts.

This is particularly relevant since following the 2018 MIFID-II legislation, which prohibited providers from bundling research costs into investors’ fees across the EU, saw the sell-side considerably shrink its research capabilities.

Mike Carrodus, CEO at Substantive Research, says: “Although Jefferies’s analyst teams have shrunk somewhat post MiFID II, in proportionate terms, the net experience lost between 2019 and the second half of 2022 was 70 per cent lower than the top 10 providers, and 80 per cent lower than their peers in the top five.”

He adds: “What’s more, where Jefferies did lose experienced analysts, they replaced them with targeted, highly ranked analysts in order to maintain the quality of the research product.”

Carrodus says the battle between providers is “much more open than it has been for years”, and notes that the top banks’ commitment to their research products will continue to be tested this year. 

He adds: “Outside of the top 10, there are many high quality, niche providers that will likely be impacted in future, as their ability to subsidise investment in both people and regulatory challenges is limited.”

Those regulatory challenges include a likely softening of the unbundling rules laid out in MIFID-II, although EU regulators are yet to make clear how far back those regulations will be wound.

At the same time the UK is scheduled to conclude its Investment Research Review in June 2023, which also will likely see a return to re-bundling. 

Carrodus says that the buyside is furious that having gone through compliance with the unbundling regulations in MIFDI II, they are expected to return to the old regime.

“The best thing to have done was not do [unbundle] in the first place. They were telling regulators not to do his because it would have an effect and they went and did it anyway.”

There are also questions about the willingness of the buyside to re-bundle the cost of research since doing so would inevitably lead to an increase in client fees.

Carrodus says: “The fact is, there is zero propensity among the buyside in Europe to take advantage of [re-bundling] because in a current market environment, having any discussion about fees are terrifying, even if we are only talking about a single basis point.”

However, the US financial regulator has cleared up some uncertainties that have been plaguing the market since February.

This week the House Financial Services Committee voted to extend the no-action letter for six months and study the impact of potential expiration.  

The no action letter had allowed cash research payments from Europe to the US to accommodate MIFID II but was scheduled to expire on 3 July, leaving US brokers unable to process payments from European clients.

Carrodus says: “The expectation is that this [extension] will not pass before the July 3 expiration date, but hopefully still sends a message to the SEC to extend by six months and give time for more brokers to register as investment advisers or find another solution.” 

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