The change in rules was aimed at pushing more stock trading onto regulated public exchanges, where prices are visible to all, and giving retail investors more information about potential investment returns.
The rules — the Markets in Financial Instruments Directive II (MiFID II) and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation — for some funds, came into force in January.
The head of the Financial Conduct Authority (FCA) said PRIIPs risked having a detrimental impact.
“I am concerned about PRIIPs,” the FCA’s chief executive Andrew Bailey told an FCA conference last week. “It carries the risk of it leading to literally accurate disclosure which is not providing useful context.”
“We intend to publish a call for input next month to explore the scale of the potential problems,” he said.
In January, investment platforms suspended a number of funds for not having the correct information in place when the rules went live.
The introduction of MiFID II has seen research ‘unbundled’ from other brokerage services in an effort to ensure transparency and value for money. One concern flagged by market participants is the extent to which investment research can still be offered to clients, and at what cost, without being seen as an inducement to trade with the broker supplying the research.
Vicky Sanders, co-founder of independent research platform RSRCHXchange, said MiFID II was having a “profound impact” on the research market and it should come as no surprise that the FCA was “starting to formally ask questions”.
“In our recent global research unbundling survey, 75% of European respondents felt that the low prices for research were unsustainable,” she said.
Andrew Glessing, head of regulation at asset management consultancy Alpha FMC, said potential conflicts in the provision of investment research had been a focus of the FCA “for some years” and it would want to see two things.
“Firstly, in a changing investment research market, is the new model delivering the inducement-free outcomes it seeks? and secondly, can firms can demonstrate that they have embedded the right governance and controls needed? Time will tell.”
Bailey said the market was still adjusting and would be kept “under close scrutiny”.
Although Britain is leaving the EU next March, it wants a “business as usual” transition deal until the end of 2020, meaning its ability to radically depart from MiFID II and PRIIPs is limited.
John Adams, partner Investment Funds at Shearman & Sterling, questioned how useful an FCA investigation would be given that asset managers have already adapted to the new rules.
“I hope the FCA is pragmatic in its review and in its findings. Investment managers and other market participants have spent a huge amount of time, money and effort implementing MiFID-compliant research arrangements, in good faith,” Adams said.
“So it would be disappointing if the FCA’s conclusions mean that managers have to revisit this all over again.”
A logo is seen at the headquarters of the Financial Conduct Authority (FCA) in the Canary Wharf business district in London. John Adams, partner Investment Funds at Shearman & Sterling, questioned how useful an FCA investigation into the impact of new European Union rules on the asset management industry would be given that asset managers have already adapted to the new rules.