Banks and investment managers are poised to win some concessions from the European Union over plans to overhaul the market for financial research.
The European Commission, the 28-nation EU’s executive arm, is considering softening a proposal to require asset managers to get written agreement from clients before increasing research charges. The European Securities and Markets Authority included the requirement in its guidance to the commission on overhauling the current payment system.
Investment banks and portfolio managers said ESMA’s blueprint for separating out research costs from fees paid for executing trades could backfire by harming the EU’s competitiveness and making it more expensive for businesses to raise funding.
The commission has “identified a number of adjustments designed to reduce the impact” of the draft rules, while “preserving the objectives,” according to a document dated April 16 and obtained by Bloomberg. The commission prepared the document for an April 23 meeting with national finance ministries.
In the draft, the commission steers clear of requiring written permission before raising research charges beyond a pre-agreed level. Increases in a client’s research budget “shall only take place after the provision of clear information to clients about such intended increases,” according to the draft.
Christian Krohn, managing director of capital markets at the Association for Financial Markets in Europe, said in February that the written-permission requirement was one of the “unworkable conditions attached to paying for research using client resources” in the regulator’s proposal.
Conflict of Interests
ESMA, which brings together EU national regulators, called in December for measures to tackle the current system, whereby portfolio managers pay for equity research using part of the commission they pay to investment banks and other brokers, meaning in practice that the manager’s client is the one who pays.
ESMA has argued that this system contains clear conflicts of interest and doesn’t reflect the best interests of investors.
In the regulator’s plan, the model of using clients’ money to pay for research would still be allowed to exist within a series of rules. Asset managers would have to set up dedicated “research payment accounts” funded by a specific charge to the customer that is agreed on in advance.
Banks and fund managers have said that, as proposed by ESMA, the research payment account system would leave firms with the only option of moving to a fully unbundled system, in which asset managers pay for research as a separate service with their own funds.
This would place EU investment managers at a competitive disadvantage to overseas rivals and lead to a shrinking of the research market that would it make it more expensive for businesses to raise funds, they say.
The commission has retained another element of the ESMA approach targeted by industry: a requirement that research charges not be linked to the volume or value of trades executed on behalf of clients.
The document also doesn’t deal with wider issues of how to apply the rules beyond equities markets, another source of industry concern.
The commission is seeking guidance from national experts on whether there are “further operational adjustments that are necessary or helpful in limiting the impact of these measures, while preserving the objectives of breaking the link between the purchase of research and the payment for execution, and of disclosure regarding costs.”
The commission is set to publish rules by July. These will be sent to the European Parliament and the Council of the European Union, the EU institution that represents governments, for review.