02 October 2017

Blog: MiFID II, Investment Research & Corporate Access "More or Less?"

by Scott Fulton | 2 October 2017

“It is a tale, told by an idiot, full of sound and fury, signifying nothing.”

Macbeth (Act 5, Scene 5, lines 17-28)

There is a growing sense from some market commentators that MiFID II, while superficially significant, will not change the market fundamentally as banks and brokers adapt to the new regulations quickly.

Respectfully, Capital Access Group (CAG) disagrees and has published a report today which outlines the results of MiFID II discussions with over 300 market participants in the last three months together with analysis of trading data from Bloomberg.

We conducted this work in response to enquiries from our UK clients who have become increasingly concerned about the impact of MiFID II.

Our research suggests that they have every reason to be worried.

MiFID II will come into force in less than 100 days. We believe that investment research and corporate access could change beyond all recognition in a very short space of time thereafter.

For example, we believe now that the current number of analysts providing research to fund managers will fall by close to 67.0% by 2021.

Our starting point was the current market. This analysis indicates that, of 65 non-financial sectors within the FT All Share, fully 48 of them do not generate sufficient trade to fully compensate for all the analysts working within them. Within corporate access, the current payment structure is even more opaque, bundled within trading commission or Commission Sharing Arrangements (CSAs).

In CAG’s opinion, exposing these structures to MiFID II where both services should be paid for separately would create considerable pressure on several of the current providers (banks and brokers). Pressure which will be made worse by the fact that many Fund Managers have decided to pay for services from their own resources.

Under this scenario, CAG believes that research budgets, fund managers paying investment analysts, could fall by as much as 55.0% within the short term, to less than £90.0m in the UK. Even this expenditure is likely to be several times more than that available for corporate access, where investors have been reluctant to pay brokers for meetings.

If we are right, the implications for UK companies are significant. Managing expectations, generating investor feedback and meeting new investors may all suffer from MiFID II’s restrictions. The European Securities and Markets Authority (ESMA) highlights in its own Q&A (4th April 2017) that fund managers can retain a non-MiFID II provider to provide corporate access. This would “remove the primary potential conflict of interest or inducement risk that could arise if the service is provided by a MiFID II firm (bank or broker)”.

UK companies will continue to require access to investors, market feedback and the ability to manage expectations. The apparent gap left by MiFID II’s impact on corporate broking is likely to be filled by independent, non-MiFID II providers.

It is full of “sound and fury” but, to our mind at least, it signifies a great deal.

The full report can be found here.