AQX° Securities, the service-oriented, multi-asset, execution services provider, today spoke out against ESMA’s proposal for a ban on research commission in MiFID II. In a letter sent to ESMA on 30 July 2014, AQX set out its counter-arguments, stating its disagreement to the independent EU Authority’s proposal for investment managers to be limited to accepting minor, non-monetary benefits and clearly citing the benefits to the investor of greater choice of research from a growing pool of providers. AQX also argued that ESMA’s proposed approach will impact competition between EU firms and their ability to compete further afield.
Kish Desai, Managing Director and Head of Sales, AQX° Securities, comments: “Investment managers should be allowed to purchase and accept all unbundled research so long as the arrangement complies with the inducement rules. While we agree that there is a need for more transparency as to how investment managers purchase research, a ban on the use of dealing commission to purchase research goes beyond the intent of these rules. Moreover, the proposed approach would lead to certain competitive disadvantages for EU firms, both within the EU and abroad.”
AQX’s correspondence with ESMA cited the move by more and more investment managers to select their research from the increasing number of Independent Research Providers as providing: “considerable benefits to the clients of investment managers” with services that “are differentiated by their ability to provide disinterested, non-conflicted research. Independent research providers also provide better transparency in pricing as the research provided is not bundled with execution services.”
AQX’s letter stated that thanks to the unbundling of the cost of execution and the cost of research, the resulting growth in numbers of IRPs and the choice of research on offer, investment managers are now able to provide their clients with better service, greater accountability and improved transparency.
“Unbundling services through CSAs gives investment managers visibility into what commissions pay for, and allows investment managers to negotiate for the services they want at a reasonable price. Unbundling services ultimately means lower costs and .. allows investment managers to target service providers based on their quality. CSAs provide the best framework for increasing transparency in a way that makes compliance with the inducement rules easier and, thus, the standardization of CSAs across the EU would be a less restrictive and more appropriately tailored means to achieving the underlying objectives of the inducement rules.”
AQX° also argued that ESMA’s proposed approach will negatively impact EU firms’ competitive edge. “Within the EU, smaller investment managers would be disproportionately affected, as they would be less able to absorb the cost of research. For example, larger investment managers with more assets under management would be able to pass the cost of research on to clients through a smaller increase in management fees than smaller investment managers with fewer assets under management. Larger investment managers are also more likely to have their own internal research departments and, thus, are less likely to be reliant on external research in making investment decisions.”
In conclusion, AQX° said: “While ESMA insists that EU investment managers can continue to avail themselves of research services by contracting and paying for such research on a distinct and separate basis, the more restrictive and less favourable approach taken by the EU would likely make EU investment managers less commercially appealing. In addition, the proposal would allow international investment firms to exploit a regulatory arbitrage and would incentivize some investment managers to relocate part or all of their EU operations to other jurisdictions.”
For more information and to download AQX° Securities’ complete reply to ESMA, click here.
Further information on CSAs can be found in AQX° Securities White Paper, “Honest Brokers: Unbundling Research and Execution”, can be visited here.
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AQX° Securities Speaks Out Against ESMA’s Proposed Ban On Research Commission In MiFID II - AQX° Letter To ESMA Says Proposed Approach Will Negatively Impact EU Firms’ Competitive Edge
Date 08/09/2014