What rules (legislative, administrative or other) currently apply to [a] sell-side brokers [b] credit ratings agencies [c] other research firms? Which rules could (in future) be applied to sustainable investment research providers?
- EC interest: "The study should also describe whether some national and/or international rules including, but not limited to, legislative or administrative measures could apply to sustainability-related products/services providers.”
We have a few questions for existing research providers about the extent to which they believe current regulation around investment research relates to them (if at all) and, if relevant, where they believe the boundary to be between their research and ‘investment research’ as defined in regulation.
What we (think we) already know => Context
Regulations apply to mainstream investment research providers such as sell-side brokers or credit rating agencies at a number of different levels. Whilst there is some overlap in the objective of the applicable legislation, such as oversight, each sector of the financial service market has been regulated separately, ensuring effective and proportional regulation. The Credit Rating Agencies are regulated under the Credit Rating Regulation and Directive. The sell-side are regulated under numerous pieces of national and European legislation, notably MIFID II and MiFIR, as well as those pertaining to financial stability.
Regulation focuses on:
- Regulatory frameworks including registration and supervision
- Oversight and internal control including policies and procedures
- Managing conflict of interests – (unbundling of research and avoiding in CRA)
- Training and competency of staff
- Transparency on rating activities (e.g. methodologies and changes that take place) and quality of rating process – accountability (CRAs)
- Use of product – overreliance on credit ratings (CRA)
- Increased competition (CRA)
- The way research is priced, paid for and distributed (sell side research)
Similarly, there are rules that are directly applicable to asset managers in how they report to and communicate with clients about fund and strategies they manage. These are covered by UCITs, PRIIPS, MiFID II etc.
Finally, benchmark administrators are regulated by the EU Benchmark Regulation which introduces a common framework and consistent approach to benchmark regulation across the EU. It aims to ensure benchmarks are reliable and accurate by improving the quality of input data and methodologies, and to minimise conflicts of interest in benchmark-setting processes.
We believe that no such regulations (beyond laws that govern any organization or individual that publishes information) apply to the provision of sustainable investment data, ratings and research providers. Specifically, we believe that:
- ESG agencies - do not appear to be governed by any formal rules or requirements
- Sell-side brokers - apply the same regulatory standards to their sustainability-related research as they do to the other investment research that they publish
- Credit ratings agencies - apply the same regulatory standards to their sustainability-related research as they do to the other that they publish
- Data providers - apply the same standards for the publication of sustainability data as they do for all data provision
- For impact or grant-funded research providers - do not appear to be governed by any formal rules or requirements
We will explore further whether any equivalence or parallels exists between products and services that are already provided by ‘mainstream’ investment research investment providers and also whether sustainable investment data, ratings and research providers currently consider themselves to be producing research as defined under the MIFID II Directive.