Five years ago, the European Union undertook a financial-market reform with a laudable goal: saving investors money by ending an arrangement in which they unwittingly subsidised the research departments of big banks and brokerages.
It hasn’t gone entirely as intended. But trying to reverse the reform — as some officials are now contemplating — would at this point do more harm than good.
For decades, investment research served mostly as a sort of loss leader, like “free” drinks at a casino. Banks and brokerages heaped reams of reports on institutional investors, such as mutual and pension funds, to build relationships, encourage trading, attract deal-making business, and sometimes tout stocks they wanted to unload. They recouped the cost partly through commissions for executing trades. This “bundling” troubled regulators, who worried that it inflated costs and encouraged low-quality research, all at the expense of the regular folks whose money the funds were managing.
In 2018, the EU intervened. As part of a broader reform known as MiFID II, it required the separation of payments for research and trade execution. The aim was to foster a greater emphasis on value for money — to create a dynamic market in which brokers and independent firms would compete on quality and cost. (Bloomberg LP, parent of Bloomberg News, competes in related businesses, including trading, research, and MiFID compliance and reporting services.)
The results were mixed. Research budgets plummeted as fund managers became more selective and did more work in-house. Investors reaped significant savings, while myriad analysts lost their jobs. By some measures, quality improved. Yet competition didn’t thrive. The biggest banks and brokers dominated by pricing out rivals and offering key perks such as access to company executives. That said, some smaller and independent providers have survived and even gained market share by consolidating or building top-notch analyst teams.
They should leave well enough alone. The old research model has already been upended, providers have restructured, money managers have greater power to negotiate prices, and investors appreciate the transparency. Hardly anyone wants to go back, or to endure another wrenching reform.
Encouragingly, the proposals aired so far don’t demand any major changes, and they maintain the requirement that the cost of research be reported separately. As such, the effect will likely be negligible — except for perhaps providing a bit of relief in the US, where bundling is still common and where banks and brokerages might encounter regulatory issues if they charge European clients for research.
If the EU and UK want to attract more investment into companies large and small, they should return to the long-delayed work of integrating their capital markets — harmonising bankruptcy and other rules so that money can flow more freely across borders. All the talk about unbundling and re-bundling is simply an unwelcome distraction.
The Editors are members of the Bloomberg Opinion editorial board. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
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