A new report from GreySpark Partners, a leading global capital markets consulting firm, explores the impact that the second iteration of the EU’s Markets in Financial Instruments Directive (MiFID II) will have on the investment research marketplace – forcing operators to itemise research payments separately from other fees, charges and commissions.

The report, Mastering MiFID II: Research Unbundling, details how MiFID II targets inducements that distort an investment firm’s decision-making in favour of a particular service provider, with little regard for the value of the services to their clients. MiFID II curbs the use of research as an inducement that brokers offer to investment managers in exchange for execution and requires investment managers to make either a direct payment from their own resources or a payment from a research payment account (RPA) – which is funded by client money, for all substantive investment research received.

Among the main effects of the MiFID II rules GreySpark identified:

·         the cost of equities investment research will no longer be bundled into dealing commissions and the cost of fixed income and FX research will no longer be bundled into spreads or execution costs;

·         the investment research market will move from a push to a pull model of distribution, as investment managers move from being passive research consumers to being active research buyers;

·         there will be a flight-to-quality as investment managers seek more value-added research since they will make explicit payments for it;

·         research spend is expected to fall as investment managers take more strategic approaches to their consumption and purchase of research; and

·         the barriers to entry in the research market will fall, allowing independent research providers to compete with large sellside research providers on a more level playing field.

Among fintech vendors, research unbundling is fuelling innovation to address issues concerning research management and consumption. Emerging solutions broadly consider multiple distribution and consumption channels, research valuation and ranking, the points of research consumption, brokers’ role in research and risk. Research providers must look to innovative technologies to ensure efficient compilation and distribution of information.

Asif Abdullah, GreySpark principal consultant and report co-author, said: “MiFID II’s approach to inducements and payments for research is disrupting the investment research space for all participants, including investment banks, IRPs, investment managers and fintech vendors.”

Saoirse Kennedy, GreySpark senior consultant and lead author of the report, added: “Investment banks and investment managers must develop internal processes and systems to address the requirements of an unbundled research landscape, while IRPs and fintech vendors will see new market opportunities open up to them in the form of a more competitive environment and greater opportunities for innovation, respectively.”