Europe May Relax Controversial Free Research Ban to Lift Economy

(Bloomberg) -- European policy makers could soften restrictions on research into emerging companies as part of attempts to lift the economy after the coronavirus pandemic.

Authorities in the European Union are debating loosening the “unbundling” rules that force investors to pay for research separately from their trading fees, according to private government documents seen by Bloomberg News. A reversal of this controversial aspect of the MiFID II rulebook is being considered for research on small- and medium-sized firms.

Since the introduction of MiFID II in 2018, unbundling has been blamed for removing the incentive for banks to produce research, especially on smaller stocks that could struggle to attract the attention of investors. The documents also say that issuers themselves may be encouraged to fund more research, as could stock exchanges and other venues where securities trade.

More on the topic: MiFID Losing Turf to Virus as Research-Unbundling Rules Morph

MiFID II shook up the investment research industry from London and Paris to Wall Street. The ranks of equity analysts have shrunk and revenue has declined, with banks and brokerages no longer able to lump together research on companies with fees they charge money managers for executing trades. It's especially hard to make money from analyzing smaller companies that trade relatively infrequently.

Unbundling was aimed at reducing conflicts of interest, and the authorities are mindful of avoiding such conflicts in any changes under consideration, the documents say. The European Commission, the EU's executive arm, declined to comment.

“From my point of view, MiFID II is just complicated and costly -- it increased no transparency, especially when it comes to research,” Friedrich Mostboeck, deputy chairman at the European Federation of Financial Analysts Societies and head of group research at Austria's Erste Group Bank AG, said in an interview. “You can't establish an innovative and growth market if there isn't information on these smaller stocks.”

France's Autorite des Marches Financiers published a report in January concluding that MiFID II has led to a decline in coverage and decrease in revenue for the research industry. The French market regulator's chairman told Bloomberg TV last month that he's advocating changes to the research rules, though he said it will be hard to get them enacted quickly.

The coronavirus crisis prompted emergency relief for the financial industry, but lawmakers and lobbyists for banks and money managers also want longer-term changes that spur investment. Authorities were already weighing other revisions to MiFID II to reduce compliance costs.

With MiFID II, Europe sought to put an end to the longstanding practice of investment banks offering research as an add-on to trading, which critics say obscured costs and led to overcharging. Once costs were fully disclosed, money managers ended up paying for research out of their own pockets.