Financial research has been changing hands on a quid-pro-quo basis for a long time, with stock brokers (i.e. large trading desks at international investment banks) supplying their research on stocks to investment managers in exchange for trading commissions. The true cost to the investor, an estimated USD 5bn annually, however, has not been laid bare until now.

The long-awaited ESMA Markets in Financial Instruments Directive (MIFID II), which was introduced on 3 January 2018, requires fund managers to “unbundle” their costs, meaning that research costs must be billed separately from commission costs.

This concept of unbundling or Total Cost of Investing (TCI) will have a profound impact on sell-side financial research since investment firms now face the prospect of having to justify passing on these costs to investors or absorb the research costs themselves.

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Some firms are reportedly mooting the idea of charging up to USD 40,000 per investor, while others are pledging to foot the bill themselves. Whichever the decision, it stands to reason that the amount of research being commissioned to brokers will decrease as a result of the MIFID II unbundling requirement.

This will have a knock-on impact for language service providers (LSPs) operating in financial services

Although the full impact is yet to be felt, reports from consulting firm Oliver Wyman predict that there will be significant cuts to research spending in the region of 10 to 30%, with best guess estimates coming in at around a USD 1.5bn reduction.

This will have a knock-on impact for language service providers (LSPs) operating in financial services. LSPs and translators who have been involved in translating financial research for the equities market are likely to find that volumes will slow in line with the decline in research commissioning by investment firms.

Where are the Volumes?

The language services needs of the trading side of investment banks come largely from the multitude of macroeconomic and financial market articles and research reports that they generate. Larger investment banks usually have a proprietary research and strategy team that generates the house views and recommendations based on economic statistics, global news and market movements.

Research and strategy teams basically support the ‘sell-side’ of the trading desks, although many proprietary traders will also refer to their own banks’ reports for insights and ideas.

The reports and articles written by these in-house experts are then sent by the sales person to their clients, who are typically investment fund managers, high net wealth individuals or corporate treasurers, in the hope of triggering a trade and thereby earning the commissions that are at the core of the unbundling issue.

Most regional or global investment banks with a research and strategy team cover thousands of instruments across tens of countries. This means thousands of pages of content every month.

The content that they generate can vary in length and frequencies. They can be daily or weekly roundups that are just 1-3 pages or in-depth company, sector or country reports that are lengthy and highly technical discussions that can run into 20 – 30 or more pages.

Most regional or global investment banks with a research and strategy team cover thousands of instruments across tens of countries. This means thousands of pages of content every month. While only a small fraction of this is translated, it still generates substantial business for highly specialized LSPs.

From Europe to the World

Although MIFID II only applies to countries in the European Economic Area, firms outside of these jurisdictions may have to comply with certain MIFID II norms, or to assist EU entities with their obligations, dependent on their level of involvement with Europe-based investing.

In the US and Asia markets, for example, firms will need to ensure they are aware of and can fulfill their potential commitments. MIFID II is far-reaching in terms of the breadth and depth of its ambitions, and the impact from its long-awaited introduction will be felt worldwide.

A major concern is that (…) large investment banks will continue to cut back their research units

The regulators hope that MIFID II will improve investor trust and protection, increase independent research and competition, and remove a big conflict of interest in preventing investment research from being exchanged for trading commissions.

However, many of those impacted maintain that the Directive is overreaching, and could instead inhibit trading. A major concern is that smaller investment firms who are unable to absorb the research costs will suffer, that less-established research providers will fold, that large investment banks will continue to cut back their research units, and that the Directive will limit competition further in an already scale-driven equities market.

Beyond Research

Financial translators will also need to familiarize themselves with the MIFID II landscape given that references to MIFID II are creeping into financial documentation, and may also trigger updates to fund collateral such as prospectuses, shareholder notices and annual reports.

A more peripheral demand for translation may arise in the forms of e-learning content and other internal company material. Generally speaking, though, unlike previous regulations such as UCITS IV and V, which have introduced new document types and language requirements, and have subsequently created fresh demands for translation, MIFID II in its current form will cause demand for language services to fall.