From unbundling to rebundling: Is the research funding market coming back together?

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Introduction

On 3 January 2018, the second Markets in Financial Instruments Directive (MiFID II) changed the rules of the game. By requiring asset managers to separate payments for research and execution, it aimed for transparency but inadvertently fragmented the market, slashing the availability of quality research for small and medium-sized enterprises (SMEs).

Since then, the UK and EU have diverged. Post-Brexit, the UK has leveraged its regulatory freedom, with the Financial Conduct Authority (FCA) reintroducing joint payments for research and execution, prioritizing flexibility over rigid rules.

Meanwhile, the EU’s Listing Act,¹ effective as of 4 December 2024, seeks to revive public equity markets. It removes the €1 billion SME threshold² and allows joint payments for research and execution under specific conditions. By softening MiFID II’s strict separation rules, the Listing Act aims to boost research coverage for SMEs and enhance the attractiveness of public markets by increasing liquidity, investor confidence, and access to reliable research.

Both markets are tackling the same crisis—dwindling equity research coverage, fewer public listings, and a diminished ability for SMEs to raise capital through public equity markets—but in different ways. The real question now is not who is right, but whether these paths will lead to a shared destination or further divergence.

EU’s response to MiFID II

The adoption of MiFID II triggered a major shift in the investment research industry.

Introduced in January 2018, MiFID II aimed to increase transparency, protect investors, and strengthen market integrity across all EU Member States. A cornerstone of this framework was the requirement for asset managers to “unbundle” payments for research costs from trade execution fees.

To comply, managers had to pay for research explicitly; either directly from their own profit and loss (P&L) or through a strictly segregated Research Payment Account (RPA), funded by clients. For discretionary mandates, monetary or non-monetary inducements were prohibited, effectively mandating explicit research payments across the industry.

While well-intentioned, MIFiD II’s implementation triggered significant unintended consequences:

• Shrinking budgets: Research spending dropped as firms struggled to absorb costs.
• SME coverage decline: Coverage of smaller companies fell sharply, making them less visible to investors.
• Market fragmentation: Smaller brokers, unable to compete with large firms that could absorb costs, were squeezed out.
• Reduced output: Many research functions moved in-house or ceased altogether, weakening capital markets and limiting funding options for smaller EU companies.

In response, the EU has begun to adjust its regulatory approach. On 8 October 2024, the Council of the EU formally adopted the Listing Act package. A key component of the EU’s Savings and Investments Union (SIU) strategy, the Listing Act aims to make public markets more attractive by reducing administrative burdens.

Crucially, it proposes raising the MiFID II research unbundling threshold from €1 billion to €10 billion in market capitalization (the total value of a company's shares), a move intended to restore SME research access and market competitiveness. This signals a strategic shift, with policymakers looking to balance transparency with market vitality.

FCA’s approach to bundling research

With the EU easing some of MiFID II’s strict research rules via the Listing Act, UK firms faced a new post-Brexit reality: balancing flexible research payments with investor protection.

In 2024, the FCA decided to allow research and execution payments to be bundled once again. While payments can now be made through a single commission, firms must maintain robust governance and internal controls to ensure research costs are identified, budgeted, and reviewed separately from execution costs. To manage potential risks, the FCA introduced a set of “guardrails”:

• Internal governance: Firms must maintain clear policies to ensure internal accounting and governance separation between research and execution costs.
• Budgeting and value: Annual budgets for third-party research are required, alongside regular reviews to ensure the content genuinely supports investment decisions.
• Transparent allocation: Clear procedures must be in place for cost allocation.
• Strict definitions: Specific services, such as trade commentary or bespoke transaction advice, are explicitly excluded from the definition of research.

These safeguards go beyond the EU’s current Listing Act and are designed to prevent low-quality research, redundancy, and undue influence on execution.

The market is expected to approach these changes with caution. While many industry participants welcomed the greater flexibility, implementing bundled structures requires careful planning, internal adjustments, and clear client communication. Still, the FCA’s stance is firm: research should be more accessible, but the associated costs must remain disciplined and transparent.

Toward convergence?

The post-Brexit landscape reflects a cautious but meaningful move toward alignment between the UK and EU. Both markets have eased their stance on unbundling, acknowledging the challenges faced by smaller firms and the need for more flexible, pragmatic approaches. However, operational differences and regulatory nuances remain for cross-border asset managers and research providers.

While both regimes now allow joint payments, alignment is not perfect. The UK rules have been live since August 2024, while the EU framework will not take effect until mid-2026, with implementation varying by Member State. Nevertheless, the EU’s removal of the €1 billion SME threshold, and the UK’s simplified budgeting requirements, are making it easier for firms to operate across borders.

Early signs suggest the market is adjusting rapidly. According to this industry survey, 87% of UK asset managers expect at least half of their research budgets to be covered indirectly by clients through execution fees within two years—up from just 7% prior to the FCA’s rule change. This shift may also reopen access to US research providers, who often cannot accept unbundled payments under Securities and Exchange Commission (SEC) rules.

The crucial question is whether the challenges created by the MiFID II unbundling rules can be fully addressed. While it is too early for a definitive verdict, the reintroduction of bundled research payments and increased regulatory flexibility suggests that research funding, market coverage, and liquidity for SMEs are on the path to being restored. Success will depend on effective implementation, cross-border coordination, and industry adoption in the years to come.