The Independent Research Industry in Europe is a fast growing part of the investing world. Member firms specializing in providing investment research to the fund management industry are independent because they are free of the potential conflicts of interest present in the main engine of investment research namely the investment banking industry.
The fallout from the tech bubble, the resulting Spitzer investigation in the US, the Myners Report on the responsibilities of institutional investors in the UK, and now the new MiFID II regulation in Europe have focused attention on the need for unbiased investment research and the role which independent providers can play.
The independent research sector is growing. A large number of IR firms have been set up in the USA and Europe covering most large industry sectors and many geographies. The industry is also populated by firms covering macroeconomics and political risk analysis. More recently a nascent industry has been emerging in Asia.
Historically, research was perceived as 'free', i.e. bundled with execution services by the investment banks. Not only did this give rise to the recognised conflicts of interest, but it made it extremely difficult for independent research providers to compete, since they had to recover the costs of their activities while the research divisions of banks could, and did, cross-subsidise their research from other activities.
In the US, the global settlement negotiated by Elliott Spitzer in 2003 required the major investment banks to fund independent research for a period of five years. In Europe, the FSA (now FCA) introduced new rules in 2006 requiring fund managers to demonstrate that dealing commissions were used only for the provision of research and execution services. These rules were further strengthened by MiFID II in 2018, which required asset managers to either pay for research from their own P&L or from a dedicated research payment account.