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Regulation

Investors pay less in research fees in 2018 due to MiFID II, FCA says

Research fees incurred by investors in equity portfolios managed in the U.K. were £180 million ($232 million) lower in 2018, following the implementation of Markets in Financial Instruments Directive II, said Andrew Bailey, CEO of the U.K. Financial Conduct Authority.

Mr. Bailey said in a speech Monday at the European Association of Independent Research Providers that money managers' research budgets have been reduced by about 20% to 30% in 2018 and overall savings from MiFID II rules are expected to reach £1 billion over the next five years. MiFID II at the start of 2018 introduced a requirement on money managers to fund investment research from their own revenue rather than using client funds.

An FCA analysis found that the price of written research has come down vs. the forecasts made ahead of MiFID II implementation in 2018.

Still the FCA wants independent research providers to continue to play a role in the market and is studying the effects of MiFID II on the pricing and price discovery in the marketplace, Mr. Bailey said in a transcript of his speech on the FCA website.

"Very low pricing also raises competition questions about the future of a sustainable and diverse research market in the interest of consumers. This is something we are keen to scrutinize and test — especially low-cost 'all you can eat' packages, or one-off events such as conferences priced substantially below cost," Mr. Bailey said.

"Larger sell-side firms have different economies of scale and scope than smaller players, and the 'right' price will ultimately be a function of the market," Mr. Bailey said in the speech.

However, "independent providers can pitch for business and offer sample material on an ad hoc basis without it being an inducement for an asset manager," Mr. Bailey added.

Responding to concerns about the potential negative effect of the new MiFID rules on the research coverage of smaller companies and the liquidity of their shares on secondary markets, Mr. Bailey said: "I think the evidence is, so far, inconclusive and does not suggest the dramatically negative impact that some predicted."

Mr. Bailey added: "Data for the 2015 to 2018 period show that analyst coverage levels on the (London Stock Exchange's) main market and on the (LSE's Alternative Investment Market) have remained broadly consistent. Similarly, LSE order book data for 2018 point to a material increase in trading volumes between 2018 and 2019, especially for small caps, suggesting liquidity has been maintained in the market."

The FCA intends to publish formal assessment of the impact of MiFID II on asset owners and investors in the second quarter.