With 6 months to MiFID II we have some exciting insights from a recent conference we attended.

We also summarise FCA’s recent findings from the asset management market study and share some growth statistics we see in our TIM MAR service.

Enjoy!

Copenhagen Conference

TIM Group Founder Colin Berthoud and compliance expert Dan Frett joined the opening panels at Institutional Investor’s “A Focus on MiFID II Implementation” roundtable in Copenhagen. To an audience of buy side COO and CFO’s, Colin spoke on “The regulatory map” and Dan on “The valuation process”. There was good, open discussion as buy-sides prepare for the unbundling of research from execution.

Valuing Research

There is a large gap between where buy-sides are now, where they plan to be when MiFID II comes into effect, and where they would eventually like to be.

• Only one in five say that they have agreed on a methodology for valuing research
• By January most say that their valuation methodology will rely heavily on qualitative feedback from PMs, and partial consumption numbers
• In the future, qualitative feedback will be augmented by an assessment of the suitability of the research to the PM’s process and its predictive accuracy. Eventually the participants expect to be working with more comprehensive consumption numbers in addition to qualitative feedback

Budgeting for Research

About half of the participants have agreed a process for their strategic research budget and, perhaps surprisingly, 100% of participants felt there is enough regulatory certainty to implement a valuation and budgeting process, indicating a commitment to get their firms ready.

Research as a Service?

Several participants argued the research should be seen as a service rather than a collection of independent documents and conversations. This would also allow the provider to include analyst access in the service. It was also mentioned that sales coverage could also be included in the service, though sales services other than trade ideas cannot be paid from client funds.

Set Menu versus A la Carte

It was clear from discussion at the conference that buy-sides want a mixed approach that combines a tiered offering (where clients pay different amounts for different consumption levels) with specific menu add-ons (where clients pay for the actual research they consume). This may differ from brokers’ preferred approach, which in general is to provide buy-sides with access to a complete research offering for an annual fee.

RPA versus P&L

An interesting trend we’ve noticed from recent conferences shows a movement away from paying for research from P&L and toward paying from client funds via an RPA. Some buy-sides, perhaps led by their compliance departments, had initially thought was that it would be easier to pay from P&L as they would not need to agree a budget with the asset owners. However, perhaps after involvement from departments outside compliance, the extra costs had weighed more heavily and several asset managers were now expecting to pay from client funds. Overall, about one third of the participants had not yet made up their minds, one third were planning to pay from P&L, and one third from client funds.

Do Asset Owners Need to Agree Research Budgets?

There was an interesting debate as to whether buy-sides can simply inform asset owners of the new client charges or if they will need agreement from their clients. Many believe that they simply need to publish the new charges, however, in the FCA’s consultation paper of December 2016 (CP 16/43) section 2.29 reads (relevant section highlighted):

[For] Residual CIS operators, AIFMs and UCITS management companies… Where the fund manager wishes to begin using a research payment account (RPA) in an authorised fund, it could be considered either as introducing a new type of payment out of scheme property or as increasing a payment to the authorised fund manager. Introducing a new type of payment is a fundamental change that requires prior approval by a meeting of unit holders, whereas an increase in payment to the manager is a significant change requiring investors to be given prior notice.

For funds that don’t fall into these three categories, it appears that fund managers need only inform clients clearly of increased budgets. Article 13, paragraph 5 of ESMA’s level 2 text states:

“Increases in the research budget shall only take place after the provision of clear information to clients about such intended increases.”

TIM Group Lessons 

1. Trade ideas remain the most effective way of paying for sales services under MiFID II
2. Predictive accuracy in research is a quality that many buy-sides would like to measure. TIM Group should work with other vendors to help provide this service
3. The research market is fragmenting. Aggregators such as TIM and new providers will have a role in bringing the right research together for their clients

If you would like to hear more on this topic, feel free to get in touch.

FCA Speaks out on Asset Management

On Wednesday the FCA published its final report on the asset management market confirming that it sees a serious failure in competition and will focus on rooting out opaque practices.

The FCA’s Remedies put customer needs first and include:

• Fee transparency (via all-in fees)
• An end to the practice of using bid-ask spreads to enter and leave funds to profit the fund manager
• A working group to specify transparent benchmarking
• The launch of a platforms market study to help retail investors
• Removal of barriers to pension pooling

The published document can be found here. The accompanying Consultation Paper CP17/18 can be found here.

Growth in Firms using TIM’s MAR Solution

We continue to have new buy-side firms and individuals receiving the investment recommendations through our system. 219 new individuals at 35 new buy-side firms since our last update brings our total to 17,103 individuals from 2,959 firms since inception. We continue to have a healthy pipeline of clients interested in the TIM MAR service and one has gone live recently.

A quick reminder that 2017 Q2 MAR Article 6.3 disclosures (Quarterly Reports) are due. Contact us to learn more about our TIM MAR solution.