Last year, the EU began a comprehensive revision of the highly controversial rules on so-called research unbundling – to reverse the mandatory separation of fees for securities trading and execution on the one hand, and costs for financial analysis on the other. As part of this process, the EU authority conducted a consultation, which ended recently.

The industry association for financial analysis and asset management (DVFA), generally supports the initiative but has numerous concerns regarding its details. „The DVFA and the European Federation of Financial Analysts Societies (EFFAS) welcome the European Commission's willingness to revise its own regulations should they prove to be ineffective“, Thorsten Müller, Chairman of the DVFA, says in an interview with Börsen-Zeitung. However, a closer look at the consultation process reveals that „regulation, once in place, does not simply disappear.“ Rather than a full repeal, the initiative focuses on adjustments, meaning regulatory intervention in some form will remain foreseeable.

Research unbundling was introduced in response to the financial crisis, aiming to enhance cost transparency for investors. „The effort was enormous, and the outcome unsatisfactory“, says Müller.

Before the revised EU directive MiFID II, which enshrined research unbundling, research coverage was broadly available, he explains. „The MiFID implementation in this regard was a disaster.“ He notes that it significantly reduced research coverage, particularly for small and mid-cap companies. Studies have shown that coverage of MDax and SDax stocks has noticeably declined, a development clearly accelerated by the unbundling.

In 2021, the European Securities and Markets Authority (ESMA) responded by lifting the mandatory separation of sales commissions and research fees for companies with a market capitalisation of up to 1 billion euros. The current debate centres on eliminating this threshold entirely, effectively removing the separation requirement for larger companies as well.

Müller illustrates his concerns about ESMA’s approach with a concrete example. In the consultation process, for instance, an asset manager addresses the annual quality review of the research it has purchased. According to ESMA, this evaluation could include competitive analyses of potential alternative research providers. „But every asset manager has an inherent interest in verifying the quality of their research, and identifying suitable alternative providers if necessary“, states Müller, so regulation is not needed for this.

Furthermore, investors have very different preferences. A hedge fund manager may be short-term driven and thus prioritises speed, whereas a long-only asset manager would focus on other aspects. „These are highly individual considerations that really do not require regulation“, the Chairman of the DVFA emphasises.

Another example concerns the tiered pricing models and fee caps proposed in the consultation. These are intended to protect investment firms from excessively high research costs. „The fact that the consultation is engaging with pricing models demonstrates an attempt at regulatory micromanagement“, Müller complains. „Every asset manager and every research provider will negotiate a price even without regulation.“

According to Müller, the total expense ratio is an excellent tool for enabling investors to see the total fees as a percentage of the fund volume. Fund returns are also disclosed. „Therefore, there is no need for detailed intervention in pricing“, he says. „We need regulation that sets a framework but does not engage in micromanagement.“ That is not the role of a regulator.

„Regulation cannot simply be switched on and off“, states Müller. Market participants adapt to it, and once corporate and process structures have been adjusted, they cannot simply be reversed. It is therefore unclear how the financial industry will respond to the revision of unbundling. „Many affected market participants may decide not to unwind the infrastructure they have introduced – even if they found it unsatisfactory – because doing so would again incur additional costs and require further adjustments to IT processes and systems.“