The FCA’s Chief Executive Andrew Bailey has been defending the the impact of MiFiDII and believes it could save investors £1bn over the next four years.

A year and a bit on from the implementation of MiFiDII and there have been plenty of people lining up to take pot shots, but this month Andrew Bailey stepped up to defend it. The results of MiFiDII, he said, had been largely positive and ‘well beyond expectations’.

Critics have attacked MiFiDII for lowering the quality of research and reducing the focus on small players. Two surveys suggested that analysts feared cuts in spending on research was leading to poorer coverage of equity market in some areas. A study from the CFA Institute found that just 44% of people said the quality of research had remained broadly consistent, while the same number believed it had fallen.

Rhodri Preece, Head of Industry research at the CFA Institute, said:

“Independent and sell-side research providers are under pressure, which we see translating into reduced research coverage, particularly in small and mid-cap equities, and fewer sell-side analysts.”

According to the CFA research the average price cut had been 6.3% but the largest cuts had come from the biggest firms. Those managing more than £250bn had seen spending fall by 11%.

Bailey, though, argued that the quality of research had remained broadly consistent for the 2015 to 2018 period. LSE order book data, also pointed to an increase of trading, especially for small caps which he suggested meant ‘liquidity’ had been maintained in the market.

Indeed, he welcomed the fall in spending, and said this could save investors substantial sums over the coming years. The rules requiring asset managers to pay for research separately from other broker services had seen most companies choose to pay for this work out of their own budgets rather than pass these costs onto the customers.

Without impacting the quality of research this, he said, had seen companies reduce their spending on research by around 20% to 30% leading to a reduction of costs for investors of £180 million in 2018. Assuming this trend continued, he stated that investors would save a total of £1bn over the next four years.

All the while managers, he said, were still able to access the research they needed thanks, largely, to the low entry level of written research.

Even so, he said, lower pricing levels could have some implications for asset managers. They would have to consider whether accepting certain prices would lead them into a conflict of interests.

“Importantly, very low pricing also raises competition questions about the future of a sustainable and diverse research market in the interest of consumers,” he added.

The effect on pricing and quality of research is, he admitted, far from certain and the regulator is still assessing the wider impact on the market of MiFiDII. Data in many areas is conflicting. For example, while there has been concerned about the quality of research and liquidity at the small cap level, research from Hardman &Co found that, while average coverage per large cap stock, on the LSE main market was down by 7.5% over 2018, coverage of the main market small caps and AIM companies across the market cap spectrum increased by 15.6% and 7.9% respectively.