Changes to UK research rules

Last night the UK chancellor made clear there will be a change to allow UK funds not to have to pay separately for research and trading. This is part of a package of measures the government hopes may encourage more companies to list in the UK, partly through greater UK pension fund investment in UK equities.

There are two obvious implications. Regulatory compliance is going to get easier for fund managers. Secondly research is going to get cheaper. Almost all UK funds pay for research themselves, rather than recharge it via a RPA (research payment account). They are not going to want to ask their fundowners to pay higher bundled commission like they used to seven years ago. So, while some will want to keep paying for research as they do now, most will look at their overall value to the sell-side and decide that if they pay nothing for equity research, just like fixed income, they won’t be disadvantaged. After all: there will no longer be a regulatory presumption that getting research for free equals an improper inducement to trade.

The implication for the sell-side is probably a one-off hit to revenues as fund managers that are paying for research today ask to get it gratis. On the plus side the cost of the contractual and billing apparatus will be lower – and will eventually disappear if the EU follows suit.

But there is a third, less obvious implication. The industry is facing a US regulatory cliff-edge around the expiry of the no-action letter (whose timing changed at the eleventh hour). Since any broker receiving “special compensation” for research must register as an investment adviser, the new UK rules apparently makes this problem go away. But this is only so long as there is no payment at all for research. If a UK fund decided it wanted to pay for research, perhaps because it wants to keep a playing field level with the continent, its brokers will fall over the US rules, particularly since there is no suggestion of coercion – the payment would be made and received by choice. So brokers’ efforts to lobby US rulemakers (which have pretty much been exhausted anyway) are now dented: the SEC sees that in the stand-off between its rules and MiFID, European rulemakers have been the first to blink.

Terence Sinclair