Opinion | Will Europe’s regulatory push for transparency accelerate the extinction of research analysts?

In Oliver Stone’s Wall Street, Charlie Sheen’s character asks Gordon Gekko over a lavish lunch at “21” about his investment strategy. Gekko, deliciously played by Michael Douglas, adroitly answers, “You do good, you get perks, all kinds of perks.”

For decades, regulators have been trying to gain control over the transparency and nature of research and entertainment expenses being buried in transaction costs. This month’s roll-out of the Markets in Financial Instruments Directive (MIFID II) is already proving to be expensive and riddled with delays. Many institutions need more time to catch up. It is proving to be a bureaucratic dinosaur, especially in the face of how technology is changing the economics and nature of financial information.

MIFID II was supposed to make European, and ultimately global markets safer, more transparent and more efficient. Covering all participants from exchanges, brokers, asset managers and retail investors, it is supposed to offer more pricing transparency by segregating payments for analyst research and trading commissions.

Unfortunately, it is another spawn of the European Union’s big bureaucracy. MIFID II sprawls over 1.7 million paragraphs. It is run by the office of the European Securities and Markets Authority, which has ballooned from 30 to 270 staff members since 2011.

Industry critics have long complained that it is too complicated and interferes with price transparency. Moreover, the vast changes required for internal compliance and accounting regimes to unbundle the accounting of fees is costly.

Investors will be increasingly unable to access high quality research. Too much regulation means that research compliance costs become too expensive. Fund managers respond by taking less risk, seeking different choices, all resulting in lower returns.