The recent publication of the UK Investment Research Review report has indicated a further divergence between the European Union (EU) and the United Kingdom (UK) in unbundling research rules. With recommendations provided in the report accepted by the UK government, it signifies the next move in the somewhat unpredictable chess game of UK-EU financial regulation following Brexit.
Published on July 10, 2023, the report provides a thorough overview of the current state of play and outlines a roadmap for changes within the investment research landscape in the UK. The Financial Conduct Authority (FCA), UK’s primary financial regulatory body, has expressed commitment to consulting on proposed rule alterations deemed necessary after the report’s findings. The revised rules, which are set to fall in line with these considerations, are anticipated to be put into practical effect by the first half of 2024.
This development represents a shift away from the EU’s unbundling rules, which were implemented via the Markets in Financial Instruments Directive II (MiFID II). These regulations required asset managers to separate, or unbundle, the costs of research from trade execution services. The EU’s reasoning was that such a separation would increase transparency and competitiveness among research providers while reducing costs for investors.
However, several disadvantages or unintended consequences have emerged in the EU’s markets following the implementation of MiFID II. These include a reduction in coverage for small and medium enterprises (SMEs) and higher concentration risk, among other issues.
In the UK, the recommended measures aim to address these concerns whilst promoting greater competition and market efficiency. Though the exact amendments to existing regulations remain in a consultative phase, legal professionals and stakeholders within the financial industry should carefully monitor these developments in anticipation of the changes to come.