The Day of the MiFIDS is here…what can we expect?
MHP’s Financial team recently hosted a panel session ahead of today’s introduction of the revamped Markets in Financial Instruments Directive – better known as MiFID II. This European-wide framework intends to make markets more transparent, minimise conflicts of interests for participants and enforce more stringent communications controls between buy and sell-side entities.
The panel comprised Stephen Hanks, Head of Market Policy at the FCA, Gervais Williams, Fund Manager and Senior Executive Director of Miton Group, Steven Fine, CEO of Peel Hunt and Lucy McNulty, Special Reports Editor at Financial News. The discussion captured a lot of different perspectives and gave a sense of how far-ranging the regulation’s impact will be across the market.
As a result of MiFID II, UK PLC will need to take more responsibility for its own investor relations, whether through revamped investor websites, beefed up in-house IR teams, smarter financial communications, paid-for analyst research or increased use of channels such as video and social media.
Some of the main questions, insights and takeaways from the session were:
1. What exactly is the framework looking to address?
The primary goal of MiFID II has always centered on increasing value and transparency for investors, whilst minimising conflicts. A point that Stephen Hanks at the FCA was clear to make during his opening remarks. He stated the regulator was “not anti-research,” and that the objective of MiFID II first and foremost was “about creating better value and fewer conflicts”.
2. Is the biggest impact going to be unintended consequences?
One of the major examples of ‘unintended consequences’ arising from MiFID II was that in attempting to price their research, brokers had become focused on outpricing rivals and, in effect, could therefore be engaged in a “race to the bottom”.
However, this regulatory gamesmanship was not necessarily confined to the sell-side, and attendees heard there was potential for investment banks to charge fund managers to offer minimum compensation for research, just to satisfy the regulator. As such, Hanks indicated there was a threshold price below which the cost paid for research would suggest a manager is in receipt of an inducement. The takeaway here was that fund managers must consider whether they are paying an appropriate price for obtaining research – easy in theory, perhaps harder in practice.
The theme of unintended consequences featured throughout the event, a further example was the issue, expected with compiling consensus forecasts, to measure expectations in trading statements and results announcements. With research potentially only visible exclusively to a small group of investors, rather than being widely and publicly available, corporates might have to compile and publish their own consensus, something some already do.
3. So, how welcome is MiFID II? It all depends on who you talk to…
In the small cap investment universe, the expectation was that companies in the £150-500 million stock market capitalisation range would feel more impact from MiFID II than those companies in the sub-£100 million range, where less coverage is normal due to their size. As research continues to skew more towards the large cap end of the market, the expectation was that this would open up greater discovery potential and could enhance the value-add of good stockpickers, particularly in small and micro-caps. The overall takeaway was that the likely impact would be a disruption in research provision coverage for small-cap companies and narrower circulation of that research.
Retail investors might need to rely on smaller companies commissioning paid-for research and publicising it via channels such as RNS Reach, enabling access for everyone – suggesting that providers of paid-for research might be beneficiaries.
Whilst, in the past, analysts’ relationships with fund managers have been quite remote, it was agreed that the impact of MiFID II was likely to encourage a more direct form of engagement in many parts of the market.
4. MiFID III in the offing?
There are some issues that still need to be addressed in subsequent reviews of the MiFID framework. The panel identified a potential issue whereby investors with no relationship to a broker will not be able to access brokers’ research or corporate roadshows (nor will the broker in question be able to offer it proactively).
It was agreed that as MiFID II beds-in and the far-reaching impact of it becomes better understood, subsequent revisions are highly likely, particularly around some of the technical standards. It has taken nearly ten years to go from MiFID to MiFID II, but it’s possible that MiFID III may come a lot quicker.