https://www.ft.com/content/6644989a-02b2-11e9-99df-6183d3002ee1 Asset managers grappling with Europe’s new markets rules have a request for the investment analysts they rely on for advice: please do not leave a message after the tone. Some fund managers have been charged recently for receiving unsolicited voicemails from bank analysts — who this year have found themselves desperately trying to fulfil quotas for the number of interactions they have with clients. The move has been spurred by tougher EU markets rules known as Mifid II, which require fund managers to pay for analyst research and insights separately to trading fees. The change, introduced in January, was designed to curb inducements and conflicts of interest — many banks and brokers historically provided research for free as a way to lure fund managers to trade with them. But in its maiden year, so-called “research unbundling” has put an uncomfortable strain on individual relationships between analysts and fund managers, forcing both sides to track meetings, calls, emails and even instant messaging chats. Brokers are under pressure to bring in valuable engagement, while asset managers fear receiving anything they might have to pay for. “What this has done is really impeded the natural information flows which are really important in this business,” said Neil Scarth, a principal at Frost Consulting, a research adviser to asset managers. “Everybody is nervous about doing something they shouldn’t unknowingly,” added Jeremy Grime, director at boutique adviser Charlton Illingworth and former chief executive of City broker Arden Partners. The shake-up is just one of the unexpected fallouts from rules that have transformed the role of the analyst and squeezed smaller research providers, with job cuts and consolidation now beginning to take place. “There are more changes to come,” said Candace Browning, head of global research at Bank of America Merrill Lynch. “There is still an overcapacity and you will see fewer research providers. ” Mifid II is a vast piece of legislation designed to inject greater transparency into markets, including new regulations that concern reporting and executing trades. But the changes to research distribution are among the most conspicuous, having already thrown up several unintended consequences. Firstly, most fund managers decided to bear the cost of research on their own books instead of passing it on to investors, as regulators had assumed they would. This prompted many to cull the number of research providers they used. According to a Liquidnet survey of 55 asset managers by trading venue, 61 per cent cut their research lists in 2018, dropping anywhere between 20 and 70 per cent of their brokers. Meanwhile, a number of big investment banks such as JPMorgan opted to slash the prices they charged for analyst research in an attempt to guard market share. This cut-throat price war has squeezed the smaller end of the market. Many are now looking to sell or merge with rivals. City watchers say that in several cases, acquirers are likely to be mid-cap US brokers. According to several people in the industry, big American banks have also fared better under the new regime than their more stretched European counterparts. In particular, those with the deepest pockets have been able to poach the top-rated analysts. The shake-up is far from over, however, and research pricing remains in flux. During the year, some asset managers have been shocked at higher than expected charges for one-to-one interactions such as calls and negotiated those prices down — meaning banks have not received the research revenues they predicted in 2018, according to multiple brokers. Others originally decided to pay low fees to brokers but then raised budgets after feeling shut out by analysts, industry-watchers say. Now, banks and asset managers are undergoing a round of end-of-year discussions about research pricing — and making tough judgments on the new product. “[The] quality of sellside research has continued to decline,” said Richard Buxton, chief executive of Merian Global Investors, an asset manager that is reviewing its providers. “Quite a lot of analysts have left to go either to the buyside or to work in [investor relations] in the corporate side,” he said. Many research providers are now hunting for a competitive edge. Ms Browning of BofA says the bank is looking at “new types of research and expanding into new asset classes”. Some note the changes have spurred innovation in the way written reports research is shared. “We’re seeing a move towards digitising the whole distribution of content,” said Matthew Long, head of capital markets for Europe at Accenture, citing numerous online research portals that have sprung up to help fund managers access research piecemeal. He predicted that larger banks that invested further in “digital content management” would win market share this year. There are still many unknowns, however, such as what enforcement of Mifid II will look like. For its part, the UK’s Financial Conduct Authority has launched a review of the rules looking at inconsistencies in the interpretation and application — such as concerns around lowball pricing by big banks. There is also a wider question over what happens once the UK leaves the EU, given British regulators spearheaded the research rules. Some EU regulators — including the chairman of France’s Autorité des Marchés Financiers — have called for a rethink of Mifid II unbundling, raising the possibility that the UK maintains stricter rules than the continent in future. But others hope the rules will eventually be launched globally, including in the US. Mr Scarth of Frost Consulting said: “The cosmic question is will this have any impact on performance. All market participants are going to have to keep re-evaluating their business model.”