Preparing for a post MiFID II world

Sell-side professionals should already be preparing for the opportunities arising from these regulatory changes. This blog post examines MiFID II’s impact on research payments, subsequent regulatory shifts, and strategies to leverage these developments.

1. The MiFID II Era: A Retrospective

To recap, prior to 2018, the costs for investment research and trade execution were often packaged together, with sell side firms providing research in exchange for execution commissions, without additional charges for the research content. MiFID II forced a separation of these costs, aiming to increase transparency and eliminate potential conflicts of interest.

MiFID II drove positive change in the industry, resulting in the creation of granular valuation models and reporting for written research, interactions and corporate access. The accessibility of this information has also created opportunities for sell side client strategy, enabling teams to align value to cost, as well as make interactions more targeted and intentional, demonstrating more value to the buy side.

However, research unbundling had two unintended consequences:

• Reduced research budgets: now required to pay for research out of their own profit and loss, the buy side faced a reduction in research budget and a need to consolidate their research subscriptions
• Reduced research coverage: reduced research budgets led the sell side to cut research coverage, especially for small- and mid-cap companies. Many smaller companies completely lost their analyst coverage, decreasing their market visibility and hindering their ability to attract investment and raise capital

2. The New World: Joint Payment Optionality

Starting in 2021, regulators have implemented changes to address the side effects of MiFID II on the health and competitiveness of European and UK capital markets. Despite good intentions, the original rules inadvertently led to a decrease in research coverage for small and mid-cap issuers. This reduction in coverage consequently limited exposure for many corporates and diminished the availability of investment recommendations for the buy side. The central theme of these reforms has been a gradual transition towards payment optionality—the ability to once again make joint payments for research and execution services.

Both the UK, via the FCA’s Investment Research Review (IRR), and the EU, through its Listing Act, have effectively reversed the most restrictive elements of the unbundling rules. 

This shift promises a number of benefits for the industry:

• Growing research budgets: the return of joint payments will likely lead to an increase in the overall spend on external research
• Expanded research coverage: as a result of increased research budgets, sell-side firms will be incentivised to increase coverage, particularly for the small- and mid-cap companies that were hit hardest by MiFID II
• Increased investor coverage: greater flexibility in payment methods will enable the sell side to service a greater number of institutional investors

On the whole, the reforms are well received. A recent survey from Substantive Research shows that 97% of respondents believe that the latest rules are workable and that 87% predict that at least half of all research budgets will become client-funded within the next two years.

3. Preparing for the Future: Recommendations for the Sell Side

The post-MiFID II world is not exactly a return to the past. While it is generally accepted that the changes will result in increased research coverage and a larger pool of institutional investors to engage with, it is unlikely that this will be achieved through increased headcount; there is a continual need to achieve these goals by doing more with less.

To fully leverage the opportunities that arise from the removal of unbundling restrictions, sell side firms will need to tighten up their processes and embrace increasingly sophisticated technologies to thrive. For each opportunity that regulatory change will bring, we propose a series of recommendations:

The latest regulatory changes recognise the critical role of sell side research, presenting a new chance for growth within the industry. While internal resourcing may appear to be at odds with increasing research and investor coverage, we believe that the return of joint payments coupled with technology innovation will enable sell-side research providers to prosper in a post MiFID II world.

Singletrack

Published: 25/09/2025