Comments from the co-founder of ERIC came as the second iteration of the European Union's Markets in Financial Instruments Directive was rolled out today.

The UK’s financial watchdog should intervene now on ultra-low research pricing to prevent a price war between asset managers, a research marketplace has said, as MiFID II enters into force today. 

The Financial Conduct Authority has confirmed it will take action if pricing reaches a point where research appears so significantly undervalued that it could be considered an inducement to use a provider’s other services. 

However, “it could take up to 18 months to determine and then intervene in a research market where the product has been undervalued, and measures should be put in place sooner to ensure a fair value for research,” Russell Napier, co-founder of the Electronic Research Interchange (ERIC), said. “High-quality research is a valuable tool that can be that can be used to meaningfully improve investor outcomes. Devaluing it could harm the end investor, in direct contrast with MiFID II’s ultimate aim.”

His comments came today as the European Union’s Markets in Financial Instruments Directive, or MiFID II, entered into force. One requirement listed in the package of sweeping new rules requires asset managers operating in Europe to “unbundle” the costs of equity research, separating them from management and service fees. 

Despite a “large number” of investment firms deciding to front the research bill themselves, many have yet to agree on a price with their brokers, Napier pointed out. 

“Costs remain unclear, even at this late stage, and some commentators have questioned whether providers will charge unreasonably low fees for access to their output,” he said. “While fees for a range of research services have suffered downward pressure since this time last year, peppercorn prices are unacceptable.”

MiFID II, designed to inject transparency into the asset management sector and reform reporting standards, covers a broad range of asset classes including stocks and bonds, commodities, currencies and derivatives. It extends to almost every party involved in financial services, from banks, fund managers and stockbrokers to hedge funds, commodity houses, day traders and invididual investors. 

“Most firms will have prepared adequately ahead of today’s implementation date,” Napier said. “However, for those who have not, it is important for them to remember that regulators are prepared to show leniency for non-compliance only if firms can show they have started to take relevant steps and are making good progress in their efforts to comply with the new MiFID II rules.”

Preparations made last year for MiFID II were estimated to have cost Europe’s asset management sector around $2.1 billion, according to a report from Expand, a Boston Consulting Group subsidiary, and HIS Markit. Opimas, another consultancy, forecasted a bill exceeding €2.5 billion ($3 billion).

For decades, asset managers have melded trading and research costs into a single fee, often receiving research from an investment bank or broker in exchange for using them to execute trades. 

It is thought that some fund houses may still be grappling with the question of who will pay the research bill: them or the client. 

Many large asset management firms, however, have said that they will pick up the bill while others have suggested they will set up in-house research teams to keep costs to a minimum. It has been suggested, though, that smaller players may not have the capital to do this, and by passing costs onto their clients could lose business to bigger houses offering zero fees.

Alexander Dorfmann, director of product management at SIX, the Zurich-based financial data vendor, has weighed in on how data could further transform Europe’s regulatory landscape. 

“The cost and operational ramifications of adopting a ‘minimal viable compliance approach’ just to meet MiFID II will be will be felt way beyond today,” he said. “Forward-looking firms are recognising they cannot afford to keep adding to the vast arrays of information every time a new rule is enforced. They’re looking to clean up the regulatory siloes and consolidate their approach. After all, regardless of the regulation in question, they all require common sets of data.”

He continued: “2018 will be the year where the compliance focus shifts from data consistency, to data quality. Expect firms to be putting the pressure on market data vendors to provide one really strong source of information."