New EU regulation being phased in early next year will provide a “shake-out” to the investment banking industry, the chairman of RBS told CNBC.
The rules due to kick off on January 3 “will have some impact on investment banking revenues,” Howard Davies told CNBC at the sidelines of a UBS conference in London.
“Because if you make people pay separately for research, for example, they would ask themselves if they really wanted it,” Davies said. The new rules — dubbed Mifid II — aim to inject more transparency into financial markets, from equities to fixed income. One of its main points is dividing research from the trading side.
At the moment, fund managers receive research in their inboxes without paying for it specifically. The cost is included in trading fees. So for example, a fund manager receives a research note on a stock with a “buy” recommendation. That fund manager might decide to buy some shares of that stock after reading that research, and will do so via the firm that sent him the research in the first place. Regulators saw this as a potential conflict of interest. From January onwards, fund managers will pay separately for research and trading fees.
“I think that it will, over time, be something of a shake-out in the research industry, because people are going to be asked whether they really value this in order to pay a separate check for it,” Davies said.
However, he added that it should not represent a “massive” loss to investment banking overall. Research “isn’t a huge income stream for investment banks, so I think there will be some reduction but I don’t think that will be massive,” Davies added.