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Regulatory Environment for Investment Research Facing Uncertainty, Substantive Study Says

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Investment research provision in the US, Europe and the UK is facing more uncertainty as the market awaits significant changes to the regulatory landscape, according to a study of the current state of broker research pricing, supply and market share by Substantive Research.

According to Substantive, MiFID II’s implementation in 2018 increased the focus on the value and cost of research, and a steady decline in research pricing has followed since then, alongside brokers downsizing their analyst teams on both sides of the Atlantic. However, certain brokers have now bucked this trend and attracted stronger revenues and greater market share, rising significantly higher in Substantive Research’s top 20 broker league table by share of research payments.

The study showed US broker Jefferies moving up to third spot from seventh at the expense of UBS, with JP Morgan and Morgan Stanley retaining the No 1 and No 2 positions in the rankings. This, according to Substantive, “is a direct result of investing in hiring and retaining skilled research analysts at a time when the market in general saw a post-MiFID II price deflation and a move towards juniorisation of research.

“Although Jefferies’s analyst teams have shrunk somewhat post MiFID II, in proportionate terms, the net experience lost between 2019 – H1 2022 was 70% lower than the top ten providers, and 80% lower than their peers in the top five. 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.”

Substantive notes that change is imminent in the major jurisdictions setting policy around investment research. In the European arena, Substantive expects MiFID II’s research unbundling reforms to be softened, although it’s unclear to what extent or what impact that may have. In the EU, the imminent Listing Act is likely to include flexibility to rebundle research and execution under certain conditions. And the UK’s Investment Research Review will be completed in June 2023 and there has been reference to potential rebundling when it was launched this March.

In the US, meanwhile, the SEC’s no action relief that has been in place since 2018, which allowed cash research payments from Europe to the US to accommodate for MiFID II, will be allowed to expire and this has thrown the market into chaos, according to Substantive. US brokers do not know how they will be able to accept payments from European clients after July 3rd, 2023.

Previous Substantive Research data indicates that brokers are taking different approaches to these challenges. Some will allow their clients to pay through their European offices for research consumed globally, others are registering as Investment Advisors (or deciding to create the infrastructure for their existing RIA to charge for research) in order to continue to take cash payments for research.  But with time running out before the lapsing of the SEC’s ‘no-action’ letter, a Substantive Research study showed in February 2023 that the market still had not identified a consensus way forward for research providers.

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