UK plans to reverse MiFID II ban on free research for clients

By Joe Mayes and Katherine Griffiths

Chancellor of the Exchequer Jeremy Hunt is planning to roll back a piece of European Union legislation that forced financial firms to separate the cost of investment research from trading expenses, part of his efforts to boost the attractiveness of the UK’s financial services sector.
The move is a key recommendation of a review into rules around investment research conducted by lawyer Rachel Kent, and Hunt is set to announce the plan in his Mansion House speech on Monday, according to two people familiar with Kent’s review who asked not to be named discussing non-public information. He is also due to reveal a pledge by insurers to invest billions of pounds into startups and infrastructure projects.

The Treasury didn’t respond to a request for comment on Hunt’s plans.

The so-called “unbundling” of research and trading services was a key feature of the EU’s Markets in Financial Instruments Directive — known as MiFID II — which aimed to increase transparency and reduce conflicts of interest when it was adopted.

Also Read | EU agrees €3.5 billion boost to fund used for Ukraine military aid

However, critics say the change has reduced the amount of investment research available. European fund managers cut their 2018 investment research budgets by a fifth as they scaled back the number of providers they used. There was industry consolidation as research headcount dropped and a contraction in coverage of smaller companies.

Read More: Why Splitting Research and Trading Is Being Rethought: QuickTake

In the terms of reference for the Kent review, the British government said low levels of investment research can “make it harder to value companies, make it more difficult for companies to attract investors, and make UK markets less attractive to businesses that want to raise capital.” It said the problem is “particularly acute for certain sectors, such as for tech and life sciences companies.”

The UK has previously flagged it would diverge from several elements of MiFID II including the research restrictions, and the EU is also exploring ways to revise the rules.

Hunt has been trying to create post-Brexit opportunities to bolster the City, setting out a package of reforms late last year that included relaxing ringfencing capital rules for smaller banks and consulting on EU-era rules around short-selling. Hunt has described Britain’s post-Brexit freedoms as a “golden opportunity.”

Since Brexit, London’s financial industry has lost some jobs and assets to the bloc and other financial hubs such as New York — a trend the EU is keen to accelerate in certain areas. In numerous sectors, a fall in migration from the EU has also exacerbated labor shortages and stoked inflation, which is the key economic threat Hunt is trying to tame.

Hunt is likely to endorse other proposals from the Kent review including a new research platform where investors can easily access the latest information on companies, plus a pre-public offering arena, where firms can raise funds without a full initial public offering, according to the people familiar.