Some global investment banks risk losing up to $240 million in business by 2020 as a regulatory overhaul, which will change the way securities research is priced and used, makes independent firms more attractive for clients, a financial consultancy said. Unlike the big banks, the smaller securities research firms do not offer trading or corporate finance. They rely entirely on what they charge for research, as will be required under the European Union’s Markets in Financial Instruments Directive, or MiFID II, due to take effect in January 2018.
Independent research firms are steadily growing, reflecting their capacity to produce analyses at a considerably lower cost than major sell-side brokerages, Hong Kong-based Quinlan & Associates said in a report released on Monday. “The most important priority for brokers now is to start making decisions around the structural make-up of their investment research offering,” said Benjamin Quinlan, chief executive of the consultancy. The gradual shift to independent researchers and the high costs associated with sustaining research divisions is piling up the pressure on large global investment banks, the report said.
The Quinlan report forecast that some research departments of big banks could face losses of up to $240 million post-MiFID II under their current structures. The potential loss does not take into account additional costs tied to a bank’s MiFID II compliance obligations, the report added. Under MiFID II, investment banks must charge fund managers an explicit fee for research rather than bundling the cost into trading commissions charged to clients, as at present.
To mitigate the impact, banks can choose to transition from the current “fully-integrated” model to operating research out of a separate unit such as a joint venture or outsourcing research to independent research providers, the report said. The immediate impact of the regulation will be in Europe – a recent Greenwich Study predicts a cut of $100 million by European money managers in research budgets over the next 12 months – but Asia and the United States will be affected too.
Global investment banks such as Standard Chartered, CLSA, Jefferies and Barclays among others, have already retrenched staff or pulled back from equity research and sales businesses in some markets. “Given the negative outlook for integrated brokerages, we feel current structures are generally unsustainable, and believe brokers will need to make a brave call around their future business models post-2018,” the Quinlan report said.