UK (Parliament Politic Magazine) – Chancellor of the Exchequer, Jeremy Hunt, is currently devising a strategy to reverse a European Union regulation that compelled financial institutions to segregate the expenses of investment research from trading costs. This initiative forms a crucial part of his comprehensive plan to enhance the appeal of the United Kingdom’s financial services sector.
A Review into Rules Around Investment Research Announced
The forthcoming initiative represents a pivotal suggestion resulting from an extensive evaluation of investment research regulations, spearheaded by lawyer Rachel Kent. It is expected that Hunt will publicly disclose this plan during his highly anticipated Mansion House speech on Monday, as revealed by two undisclosed insiders knowledgeable about Kent’s review.
These sources, who have requested anonymity to safeguard confidential information, have also hinted at Hunt’s intention to unveil a substantial commitment from insurers, pledging to invest billions of pounds into both burgeoning startups and crucial infrastructure projects.
The “unbundling” of research and trading services was a significant aspect of the European Union’s Markets in Financial Instruments Directive, commonly referred to as MiFID II. This directive was implemented with the objective of enhancing transparency and mitigating conflicts of interest.
MiFID II aimed to address the issue of research and trading services being bundled together. This practice often led to a lack of transparency and potential conflicts of interest within the financial industry. By unbundling these services, the directive sought to create a more transparent and fair environment for investors.
European Fund Managers Cut Their Investment Research Budgets
However, critics argue that this change has resulted in a decrease in the availability of investment research. European fund managers have reduced their investment research budgets for 2018 by 20% as they have scaled down the number of providers they rely on. This has led to industry consolidation, with a decline in research staff and a contraction in the coverage of smaller companies.
Nevertheless, it is important to address these concerns and find ways to ensure that investment research remains accessible and comprehensive. The reduction in budgets and consolidation of providers may have unintended consequences, such as limiting the information available to fund managers and potentially hindering their ability to make informed investment decisions.
New Rules In Motion In The European Union
There is currently a significant movement towards rolling back rules in the European Union, as member states are pushing for a complete reversal. Meanwhile, in the United States, a waiver that permitted brokers to charge European clients separately for trading and research is set to expire. This expiration will compel them to adjust to the regulatory differences between the two regions. Unfortunately, the Treasury did not provide a comment in response to Hunt’s plans.
The British government, in terms of reference for the Kent review, has shed light on the adverse consequences stemming from the dearth of investment research. It has underscored the challenges faced in accurately assessing company values and the subsequent difficulties encountered in attracting potential investors. Furthermore, the government has emphasized the negative impact of insufficient investment research on the attractiveness of UK markets, particularly for technology and life sciences companies seeking to raise capital.
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UK To Diverge Elements of MiFID II
The United Kingdom has previously expressed its intention to diverge from certain components of MiFID II, particularly the limitations on research activities. Jeremy Hunt, the former Foreign Secretary of the UK, has been diligently exploring avenues to strengthen the City’s position following Brexit.
In late 2020, he unveiled a comprehensive package of reforms, which included the relaxation of capital requirements for smaller banks and a thorough reassessment of EU-mandated regulations pertaining to short-selling. Hunt has enthusiastically referred to the post-Brexit era as a “golden opportunity” for the United Kingdom.
Following the aftermath of Brexit, London’s financial sector has suffered setbacks in terms of job losses and asset relocation, with the European Union and other financial hubs like New York capitalizing on this opportunity. The EU is particularly eager to expedite this trend in certain sectors.
Moreover, the decline in EU migration has exacerbated labor shortages and contributed to rising inflation, which poses a significant economic threat that Hunt is determined to tackle. This inflationary pressure is the primary economic challenge that Hunt is striving to address.