The banking sector has been one of the hardest hit in terms of job cuts over the past couple years – this trend may only worsen as lenders look to scale back research costs ahead of MiFID II, with analyst jobs looking to be next on the proverbial chopping block, per a McKinsey & Co. study. The upcoming regulations will force banks and venues to disclose research costs to investors, which during such lean times is likely to winnow the pool of analysts and similar personnel.
MiFID II’s regulatory framework is slated to dramatically transform the financial services industry this January. While the new legislation will foster improved transparency, reporting standards, and other obligations, one consequence could mean the curtailing of research spending by banks. Up until now, banks and asset managers were not obligated to publicize research costs – rather these services were integrated into trading costs in many instances, in essence not incurring any cost.
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No more free rides
This arrangement will be coming to an abrupt end in January 2018, as MiFID II will require the publicizing of research costs to investors. With the banking sector already in the midst of a multi-year restructuring process, previously adopted ‘lean and mean’ strategies by lenders portend sizable contractions in the research sector. According to the McKinsey & Co. study, new regulations in Europe stifling free research will lead to the axing of hundreds of analyst jobs as banks plan to trim upwards of $1.2 billion in research spending.
The report put out by the consultancy could be a devastating blow to the research sector, which thus far has managed to escape the same fate as other banking jobs, i.e. back-office and IT positions. Consequently, the report estimates that the collective $4.0 billion that is spent from the top 10 sell-side banks annually will be trimmed by upwards of 30 percent as clients exercise greater restraint on what they pay for.
Moreover, the trend may also simply represent a calibration of job cuts as the research sector has lagged well behind the sales and trading space in this regard. Indeed, since 2011, cash equity research headcount has fallen by only 12 percent, relative to 40 percent for the sales and trading sector, citing the report.
The changing regulations also call into question a broader issue, that being what the actual cost of research itself is, given that it has historically been integrated into other services. With lenders looking to put sour earnings reports and revenues behind them, the industry could be seeing wider cuts in H2 2017 ahead of the eventual passage of MiFID II.