LEVERAGING ON MiFID REVIEW TO CREATE A SUSTAINABLE AND DIVERSE ECOSYSTEM FOR SME RESEARCH

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OUR VISION

It is undoubtful that unbundling has compelled many investment firms to take clear ownership of their research spending and thus more rational decisions for the benefit of their own clients i.e. asset owners: either by adding research costs to their own P&L or by reducing the overall research costs that their own clients where facing prior to unbundling.

This change marks probably one of the first regulatory initiatives that put Europe in the forefront of the efforts to improve capital markets and investor protection. As Europeans, we should be proud of that. This is been translated by the fact that the leading US investments firms are now implementing research unbundling in same shape or form for their US clients i.e. US asset owners  

This disruptive change on a legacy model has led to quick and forceful decisions on spending cuts, not always done by subject matter experts, made investment professionals to lose unique insights on many market segments and most particularly on SME segment. Those unique insights were often supplied by EU specialized and local providers that have been losing clients since the unbundling implementation and find themselves on an unsustainable business situation.

This is being aggravated by the fact that global banks have heavily discounted their entry prices for their research services e.g. a well-known US bank offering 10K$ full access to their research portal for all users within an investment firm group. This pricing strategy aims at growing the relationships with European investment firms and then cross sell other investment banking products and services were margins are more comfortable like the public and private placement of equity and debt. This led investment firms to retain or even expand the services of global banks and discontinuing the services of a number of EU local providers.

The average reality for EU investment firms is that they have kept most research services provision from the Global banks and have cut many of the relationships that they used to have with the EU local providers that traditionally cover the EU SME national segments. Consequently, EU local providers show signs of start cutting their coverage to face lower revenues, and some may even go out of the business in the near future, leading to a lower visibility, a reduced liquidity, and a more limited access to financing opportunities for SMEs.

The quantity of research has probably not decrease, as the level of production of maintenance research which accounts for a large part of the total is still high.

The question is then what regulation can do to preserve that local knowledge produced by the EU local providers, that is instrumental to SME access to capital markets and funding, while preserving an orderly and efficient market for research. The regulatory framework should then promote:

  • A reasonable commercial pricing of research that is fair in regards to the production costs and therefore creating a level playing field between Global Investment banks and EU local providers
  • An ecosystem where SME research is delivered by Providers which are selected by investment professionals not based on pricing, as key criteria, but mainly based on objective measurement of quality, through pre-defined criteria including among others ratingsgranted by investment professionals
  • The creation of a cross EU database and marketplace for SME research that:
    • Enables SME research providers to:
      • Make their premium (paid for with transparent pricing) and sponsored (free content) research, available for sale, on a granular manner (e.g. single name purchase as opposed to full package purchases), and easily accessible by the global SME investor community
      • Participate in a bidding process for on-demand research work covering specific SMEs stocks and/or SME sectors/themes 
    • Enables investment professionals, part of investment firms’organizations, to:
      • Select, click, and buy, out of the shelf, individual research reports and granular packages that meet their specific investment needs
      • Initiate requests for research on-demand in an easy, quick standardized way and be able to select proposals based on objective and measurable criteria such as ratings by investment professionals
    • Enables corporate issuers to gain visibility on their equity story towards the investor community and to reach new investor base.   
    • Is open access for providers to publish their content and for investment firms to easily discover and consume that content
    • Has a cross country coverage of EU SMEs produced by a wide variety of EU local providers that propose EU SME research for sale on a granular manner
    • Can quickly achieve a large base of usage by investment professionals
  • The emergence of solutions that enable SMEs to run a competitive bidding process for their sponsored coverage that :
    • Is funded by themselves,
    • Is operated by private, independent and neutral 3rd parties,
    • Achieves a wide participation of providers and
    • Proposes a selection mainly based on quality criteria and evaluation

 We do believe that these solutions to would be more effective than research sponsored programs, as bundled / cross subsidized schemes have been repeatedly proven to be a source of conflict of interest.

  • Lower costs for listed SMEs enabling them to divert resources to gain more visibility and reinforce engagement from investors, including via sponsored research

Any actions to promote re-bundling of SME research will not necessarily contribute to achieve a healthy and order market for SME Research and enable investment firms to access to the right level of expertise that is much needed on investing on SMEs. This is because a mixed model on bundled for SME and unbundled for Large Caps would be difficult to manage for both investment firms and providers

The implementation by regulators of our proposal will create an environment that facilitates the production, distribution, discovery, access, and consumption of SME research, resulting in a virtuous effect for the SME research ecosystem

In respect to public funds, it should not be a long-term solution, as public money will need to be sourced from taxpayers and diverted from other public priorities. Nevertheless, short to mid-term public support will be a good use of public money, if used to stimulate an environment that:

  • Augments SMEs level of visibility, awareness and transparency, t
  • Facilitates their access to financial markets (both equity and bonds)
  • Enables them to invest to generate growth and employment.

ABOUT US

Since its foundation, ResearchPool has been focused in creating a large and diverse community of research providers and investment firms around its open access database of investment research.

We estimate that we have available on the platform over 2/3 of the existing EU SME coverage (sponsored and non sponsored), of which 30 sponsored research providers are publishing on the platform.  Our scope is global, and all EU countries are represented.

Our solid research database infrastructure was funded by ResearchPool investors and business, and we anticipate that it should meet 60 to 80% of the potential requirements to be specified by regulators if the SME research proposal moves forward. The remaining requirements can be executed and made available to the SME ecosystem in a few months’ time with limited public funding support.

With a large experience in running a research database, marketplace and management solutions, ResearchPool is also equipped to operate solutions for SMEs coverage needs that favor efficient allocation of resources and promotes research quality, while mitigating conflicts of interest.

ResearchPool is the only player providing such solutions based in the EU and with a Pan-EU outreach, close to the EU regulatory environment and the EU SME ecosystem. Furthermore, its data is hosted in Europe and falls under European data protection rules and is exclusively used for the purpose of developing its research related activities.

In this context ResearchPool could contribute to elaborating a EU-wide solution and we are happy to share our views of the financial research market.

OUR RESPONSES

Question 58. What is your overall assessment of the effect of unbundling on the quantity, quality and pricing of research?

The quantity of research has probably not decrease, as the level of production of maintenance research which accounts for a large part of the total is still high.

The risk is the decrease of the research quality, because EU local providers, that produce insightful content due to their unique knowledge of their national SME ecosystem, are and will be reducing their coverage, and eventually going out of business as a consequence of:

  • The reduction by Investment firms of the number of their research contracts and favoring Global providers
  • The underpricing of research leading to scale down of coverage by EU local providers

It is difficult to estimate the pricing changes, as before unbundling research was not offered as a separated service. What has been observed is a significant reduction of the revenues by EU local providers due to rationalization of the research services by the investment firms in favor of global investment banks.

Question 59. How would you value the proposals listed below in order to increase the production of SME research?

 Responses
Introduce a specific definition of research in MIFID II level1Fully Relevant
Authorise bundling for SME research exclusivelyIrrelevant
Exclude independent research providers’ research from Article 13 of delegated Directive 2017 /593Irrelevant
Prevent underpricing in researchFully Relevant
Amend rules on free trial periods of researchRelevant

Please specify what other proposals you would have in order to increase the production of SME research:

Regulation should defend the existence of a healthy and sustainable Research market, while preserving its order and efficiency. This should be supported the following principles: openness, transparency, competitiveness, neutrality and efficiency.

The regulatory framework should then promote:

  • A reasonable commercial pricing of research that is fair in regard to the production costs and therefore creating a level playing field between Global Investment banks and EU local providers
  • An ecosystem where SME research is delivered by Providers which are selected by investment professionals not based on pricing, as key criteria, but mainly based on objective measurement of quality, through pre-defined evaluation criteria including among others ratings granted by investment professionals
  • The creation of a cross EU database and marketplace for SME research that:
    • Enables SME research providers to:
      • Make their premium (paid for with transparent pricing) and sponsored (free content) research, available for sale, on a granular manner (e.g. single name purchase as opposed to full package purchases), and easily accessible by the global SME investor community
      • Participate in a bidding process for on-demand research work covering specific SMEs stocks and/or SME sectors/themes 
    • Enables investment professionals, part of investment firms’ organizations, to:
      • Select, click, and buy, out of the shelf, individual research reports and granular packages that meet their specific investment needs
      • Initiate requests for research on-demand in an easy, quick standardized way and be able to select proposals based on objective and measurable criteria such as ratings by investment professionals
    • Enables corporate issuers to gain visibility on their equity story towards the investor community and to reach new investor base.  
    • Is open access for providers to publish their content and for investment firms to easily discover and consume that content
    • Has a cross country coverage of EU SMEs produced by a wide variety of EU local providers that propose EU SME research for sale on a granular manner
    • Can quickly achieve a large base of usage by investment professionals
  • The emergence of solutions that enable SMEs to run a competitive bidding process for their sponsored coverage that is
    • funded by themselves,
    • operated by private, independent and neutral 3rd parties,
    • Achieves a wide participation of providers and
    • Proposes a selection mainly based on quality criteria and evaluation
  • Lower costs for listed SMEs enabling them to divert resources to gain more visibility and reinforce engagement from investors, including via sponsored research

Any actions to promote re-bundling of SME research will not necessarily contribute to achieve a healthy and order market for SME Research and enable investment firms to access to the right level of expertise that is much needed on investing on SMEs. This is because a mixed model on bundled for SME and unbundled for Large Caps would be difficult to manage for both investment firms and providers

Question 59.1 Please explain your answer to question 59 and in particular if you believe preventing underpricing in research and amending rules on free trial periods of research are relevant:

If the proposal is implemented, regulators will create an environment that facilitates the production, distribution, discovery, access, and consumption of SME research, resulting in a virtuous effect for the SME research ecosystem.

This is because the proposal promotes a model that enables the selection of the best possible providers, widens distribution to any investment professional that may be interested on the specific research, facilitates a quick and seamless discovery and access, and on-the-go consumption. This is achieved by promoting best practice and leveraging on the digital technology.

The free trials should be framed in a way that enables each investment professional to discover research of a specific provider on a reasonable frequency, avoiding that free trials are use a way to get access without payment. Therefore, we support the review of the free trial rules not necessarily on the frequency of the free trial, but on the ability that the recording of the free trial is based at the investment professional level and not at the firm level.   

Question 60. Do you consider that a program set up by a market operator to finance SME research would improve research coverage?

Rather negative

Question 60.1 If you do consider that a program set up by a market operator to finance SME research would improve research coverage, please specify under which conditions such a program could be implemented:

N/A

Question 60.1 Please explain your answer to question 60:

If we consider Program to be a program directly financing financial research for SMEs and not a platform we are negative.

We rather propose the emergence of solutions that enable SMEs to run a competitive bidding process for their sponsored coverage that is:

  • funded by themselves,
    • operated by private, independent and neutral 3rd parties,
    • Achieves a wide participation of providers and
    • Proposes a selection mainly based on quality criteria and evaluation

We do believe that these solutions would be more effective than program set up by a market operator to finance SME research, as bundled / cross subsidized schemes have been repeatedly proven to be a source of conflict of interest.

Question 61. If SME research were to be subsidised through a partially public funding program, can you please specify which market players (providers, SMEs, etc.) should benefit from such funding, under which form, and which criteria and conditions should apply to this program:

Public funds should not be a long-term solution, as public money will need to be sourced from taxpayers and diverted from other public priorities. Nevertheless, short to mid-term public support will be a good use of public money, if used to stimulate the development of solutions that:

  • Augments SMEs level of visibility, awareness and transparency,
  • Facilitates their access to financial markets (both equity and bonds)
  • Enables them to invest to generate growth and employment

Question 62. Do you agree that the use of artificial intelligence could help to foster the production of SME research?

Neutral

Question 62.1 If you agree, which recommendations would you make on the form that such use of artificial intelligence could take and do you see risks associated to the development of AI-generated research?

N/A

Question 62.1 Please explain your answer to question 62:

 The use of AI should never lead to “replacing” knowledgeable local fundamental analysts which are key in producing valuable research for investment professionals.

Additionally, AI requires data and big data, sourced from alternative data source. This is something that structurally lacks in the SME universe. Over-relying on AI would as a consequence incur extra volatility in the results of AI analysis.

Question 63. Do you agree that the creation of a public EU-wide SME research database would facilitate access to research material on SMEs?

Rather agree

Question 63.1 If you do agree that the creation of a public EU-wide SME research database would facilitate access to research material on SMEs, please specify under which conditions this database should operate:

The conditions for a database that meets its purpose are the following:

  • Enables SME research providers to:
    • Make their premium (paid for with transparent pricing) and sponsored (free content) research, available for sale and access to the global SME investors community on a granular manner (ie single name purchase as opposed to full package purchase)
    • Participate in a bidding process for on-demand research work covering specific SMEs stocks and/or SME sectors/themes 
    • Enables investment professionals, part of investment firms’ organizations, to:
      • select, click and buy, out of the shelf, individual research reports and granular packages that meet their specific investment needs
      • Initiate requests for proposition in an easy, quick standardized way and be able to select proposal based on objective and measurable criteria
    • Enables corporate issuers to get closer to their investor’s community and to reach new investor base by keeping a fluid communication
    • Is open access for providers to publish their content and for investment firms to discover and consume that content
    • Has a cross country coverage of EU SMEs produced by a wide variety of local EU providers that proposed EU SME research for sale on a granular manner
    • Is able to quickly achieve a large base of usage by investment professionals
    • That database should be operated and owned by some privately owned, independent and neutral player, dedicated to research related activities.

ResearchPool could contribute to elaborating a EU-wide solution based on its historical focus in creating a large and diverse community of research providers and investment firms around its open access database of investment research.

We estimate that we have available on the platform over 2/3 of the existing EU SME coverage (sponsored and non sponsored), of which 30 sponsored research providers are publishing on the platform.  Our scope is global, and all EU countries are represented.

Our solid research database infrastructure was funded by ResearchPool investors and business, and we anticipate that it should meet 60 to 80% of the potential requirements to be specified by regulators if the SME research proposal moves forward. The remaining requirements can be executed and made available to the SME ecosystem in a few months’ time with limited public funding support.

With a large experience in running a research database, marketplace and management solutions, ResearchPool is also equipped to operate solutions for SMEs coverage needs that favor efficient allocation of resources and promotes research quality, while mitigating conflicts of interest.

ResearchPool is the only player providing such solutions based in the EU and with a Pan-EU outreach, close to the EU regulatory environment and the EU SME ecosystem. Furthermore, its data is hosted in Europe and falls under European data protection rules and is exclusively used for the purpose of developing its research related activities.

Question 63.1 Please explain your answer to question 63:

We fully agree on a EU wide research database but it should not be run/operated by public entities and it should not be financed by public funds in the long run.

Question 64. Do you agree that ESMA would be well placed to develop such a database?

1 – Disagree

Question 64.1 Please explain your answer to question 64:

ESMA focus is and should be focused in creating a regulatory environment that promotes an order and efficient financial markets that meet its purpose of funding the economy for economic growth and social impact, and not necessarily to develop technological solutions that require business, digital and technological expertise.

The private sector e.g. ResearchPool already offer such type of solution that we estimate meets a large part of the potential requirements.

Question 65. In your opinion, does issuer-sponsored research qualify as acceptable minor non-monetary benefit as defined by Article 12 of Delegated Directive (EU) 2017/593?

4 – Rather agree

Question 65.1 Please explain your answer to question 65:

The issuer-sponsored research should be acceptable as a minor non-monetary benefit, only if it is fully funded by the issuer and in such case, it should be publicly available on-line without restriction and for free. If it is funded partially or totally by a Provider then it should not be considered as a Minor non-Monetary benefit for investor protection reasons.

Question 66. In your opinion, does issuer-sponsored research qualify as investment research as defined in Article 36 of Delegated Regulation (EU) 2017/565?

5- Fully agree

Question 66.1 Please explain your answer to question 66:

The sponsored research should be considered as any other investment research, as it is for a large majority of thorough and deep knowledge work on the investment case of the relevant issuer. The focus should be to mitigate any risk of conflict of interest by compelling issuers to run a competitive bidding process based on objective and measurable quality criteria and evaluation by investment professionals

KPIs sourced from investment professionals use and evaluation of the previous work produced by each provider that responds to such bidding.

Question 67. Do you consider that rules applicable to issuer-sponsored research should be amended?

4 – Rather agree

Question 67.1 If you do consider that rules applicable to issuer-sponsored research should be amended, please specify how:

We believe that Regulation should:

  • Issue recommendation and promote best practices, alongside European marketplace associations such as SFAF in France to reinforce neutrality of sponsored research
  • Require a specific tagging to indicate to end users that it is issuer sponsored research
  • Ensure that it is publicly available on-line without restriction and for free.
  • Require that the selected issuer-sponsored research coverage goes through a competitive bidding process based on objective and measurable criteria such as evaluation by investment professionals to mitigate conflict of interest

Question 67.1 Please explain your answer to question 67:

We do not believe the rules should be totally changed but rather more detailed.

Question 68. Considering the various policy options tested in questions 59 to 67, which would be most effective and have most impact to foster SME research?

 Responses
Create a program to finance SME research set up by market operators Neutral
Fund SME research partially with public money Irrelevant
Promote research on SME produced by artificial intelligenceIrrelevant
Create an EU-wide database on SME researchFully relevant
Amend rules on issuer- sponsored researchFully relevant

Please specify which other policy option would be most needed and have most impact to foster SME research:

Prevent underpricing in research.

Question 68.1 Please explain your answer to question 68:

To prevent the underpricing in research will enable local EU providers to survive, and the EU-wide database on SME research will enable the expansion of their business and their quality work.

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