Its difficult to believe that its been a year since the implementation of MiFID II. As if adjusting to this new regulatory landscape wasnt enough, banks and brokers now face fresh challenges around Brexit and a no deal scenario could introduce a plethora of new operational headaches. Firms are just finalising their research payment contracts and are now faced with the possibility of a hard-Brexit, which risks throwing them back to square one.
Despite ongoing Brexit turmoil, for the moment the UK is due to leave the EU with a deal on March 29th 2019. In light of this, European based brokers should consider reviewing all of those research contracts and agreements they have just aligned with MiFID II requirements in line with the new requirements for Britains deal on financial services. Fee structures, tax implications, budgets and invoicing activities will all need a rethink. This will lead to a mountain of contractual paperwork and requires the implementation of new processes and procedures. However, getting to grips with post-Brexit bureaucracy is only part of a much wider problem for European and UK research houses.
With the UK outside the European Economic Area (EEA), how will the relationship between British based research brokers and their EU clients change? The problem is, since MiFID II, the number of formal counterparty research agreements have jumped tenfold for houses. If the UK is not aligned 100% to the same research rules and tax rates come March 29th 2019, its going to be much harder to work out and process accurate research invoicing and spend. Major industry players such as Londons LCH have expressed concerns that regulatory equivalence, which is the PMs current plan for financial services, will not be enough to prevent an operational nightmare.
And if Brexit wasnt enough to think about, the knock-on effects of the MiFID II research unbundling rules are still reverberating across the industry. The buy-side has been forced to review their research sources and, in many cases, scale back on the costs. This has created a price-war among brokerage houses, who are having to compete fiercely for business. These effects arent quite as severe for the bigger research and specialist houses, but for the midrange firms, this is hugely detrimental. Recent research from Greenwich Associates, however, has highlighted that specialist houses have not quite been feeling the benefits of these changes and, as a result, the main beneficiaries of the changes has been the larger investment banks.
Evidently, navigating Brexits bureaucracy will only be part of a much wider problem for research houses still getting to grips with the post-MIFID II market structure. Just as Research brokers have got their MiFID II operations in line, along comes Brexits uncertainty. As outlined by the LCH, regardless of whether the deal is signed off or not, research brokers need to prepare for all possible eventualities. At this stage, its hard to say exactly how big the invoicing headache will be on every research contract. But, if transparency really means transparency under MiFID II and Brexit really does mean Brexit, perhaps they should consider arming themselves with the capabilities to manage all research contractual processes with ease.
By Daniel Carpenter, Head of Regulation at Meritsoft
