On 10th October, Consilium Strategic Communications and Covington & Burling co-hosted a breakfast panel discussion to debate the impact of the new Markets in Financial Instruments Directive framework (MiFID II) which comes into effect across Europe on 3rd January 2018. The regulation, described as the most significant change to the financial markets since the Big Bang in the 1980s, has created substantial confusion in the market. Consilium assembled a panel of experts, chaired by Consilium Partner and Co-Founder Amber Fennell, to help decipher the most impactful aspects. Charlotte Hill, Partner at Covington & Burling, Greg Swallow, COO of Berenberg, Martin Wales, Global Healthcare Analyst at M&G Investments and Gareth Evans, Founder and Managing Director of company sponsored research house Progressive Equity Research, gave their views and insights on what to expect next year.
MiFID II in a nutshell
Chief among the new changes is the required abolition of payments for analyst research using dealing commission and complete “unbundling” of research from other services offered by banks, requiring institutional investors to account for research using a specific budget.
Many are still not prepared for the new regime, with several panellists commenting that some investors, particularly smaller firms, are still not clear on how they are going to implement the new rules in time
to hit the ground running in January. The good news, according to the panel, is that it seems likely that the regulatory authorities will be “lenient” in their enforcement of the new regulations over the first year, although the definition of “lenient” is unclear.
Rumours of “the death of consensus” are greatly exaggerated, but panellists conceded that coverage of mid and small cap stocks will almost certainly reduce as a result of the new regulations. There will be a greater onus on the in-house IR functions of small and mid-sized companies to guide the markets on anticipated performance and company sponsored research houses are a likely beneficiary of this gap. None of the panellists expected to see a drastic reduction in the number of analysts overnight, but a slowdown of recruitment and a broader remit for many analysts seems likely.
Corporate access is included in the “unbundling” which means it could become harder for companies to meet new investors. According to ESMA (European Securities and Markets Authority), the provision of corporate access in the form of arranging meetings could involve the allocation of valuable resources by the provider and could influence the recipient’s behaviour – a potential inducement. ESMA expects fund managers to assess whether corporate access services facilitated by a broker are material or of minor non monetary benefit and, therefore, whether these services can be accepted.
Some institutional investors have decided to absorb the cost of research – but it isn’t clear whether this will become the norm. Passing on costs to clients will require fund managers to designate and manage a specific budget for research as well as to regularly assess the quality of research received to ensure that it represents value for money – and many see this as too burdensome. Firms are understandably reluctant to be open about how they intend to navigate the new rules and how they intend to select which research to consume. However there was agreement that online research marketplaces like Alpha Exchange and RSRCHXchange are firmly on the radar as service providers.
A lot is riding on how the US reacts… The unbundling of research from execution charges poses a challenge for US brokerdealers due to existing rules that prohibit such a separation. In the US, brokers are prevented from receiving direct payment for research unless they are registered as an investment adviser – which would impose more stringent duties and compliance burdens. The SEC (US Securities and Exchange Commission) has acknowledged the major discrepancy between its own rules for broker-dealers accepting payments for research and the new European rules, while we await final guidance from the SEC – most commentators believe that they will implement regulatory relief on the conflict between paying for research and the US investment Advisers Act, which should mean that US analysts will still be able to provide research to European clients – but this remains to be seen.
About Consilium Strategic Communications
Consilium Strategic Communications is a global leader in strategic healthcare communications advisory with offices in London and across the US. Consilium’s highly-skilled team provides strategic, long-term advice to healthcare companies, Boards, senior decision makers and executives on critical communications programmes and stakeholder challenges. The Company has established deep knowledge across all areas of the global healthcare sector through broad experience in representing international clients spanning the Fortune 500, FTSE100, FTSEurofirst 300 and FTSE250, through to discrete specialist reputation management projects.
