MiFID II: Should IROs prepare for life with a weakened ally?
14 March 2017
By Amit Sanghvi
Since November 2007, Markets in Financial Instruments Directive (MiFID) has been a primary governing force of the European Union’s regulation of financial markets.
MiFID has served to create competition between investment services and has endowed investors with more choice and lower prices. After the 2008 financial crisis, however, it became apparent that European rules on securities markets needed to be tightened.
Enter MiFID II, an upcoming piece of legislation (January 2018) from EU regulators which, among other things, seeks to unbundle the trading commission and investment research fees paid by asset managers to brokers. The result: each piece of sell-side research will carry a cost, and asset managers will have to justify the purchase of any research to asset owners or pay for it out of their own pocket.
While MiFID II is an EU directive, it is likely to influence the research service model around the world — unsolicited research would no longer be acceptable by European asset managers. Thus, global research providers that operate in the European markets would either need one service model for Europe and a different one for the rest of the world, or adopt the European model globally.
Here’s what IROs should know about these MiFID II implications.
The uncertain future of the sell-side analyst
The sell-side, a great ally to IROs, are like a shop window for corporates. As with any shop, if the shop keeper’s ability to attract customers takes a hit, then suppliers must look to other channels to fall back on or assume more direct marketing themselves. As the fate of the sell-side industry unfolds, IROs will want to identify and strengthen other channels — such as their website, roadshows, investor days, conferences, social and traditional media, and other in-person touchpoints — to market their companies to investors.
If, as expected, the number of analysts decreases, corporates (especially non-blue-chips) will be vying for the attention of a smaller number of sell-side analysts than before MiFID II. Any fall in analyst numbers is most likely going to be caused by the sell-side’s inability to price research appropriately and/or produce high-quality research to match the price.
This does not mean the sell-side function would die with MiFID II. Even in the unlikely scenario that all existing sell-side analysts disappear, the sell-side function — the provision of research — will live on as asset managers continue to demand good research that leads them onto the next investment opportunity. So while sell-side analyst numbers may fall, it is likely that we will see asset managers choosing to conduct research in-house or partner with each other for a more cost-effective, higher quality solution. Similarly, we may find that independent research providers prosper where once they might have struggled to compete with the bundled offering of the sell-side.
The danger for IROs is that, as their once powerful ally loses its sway over asset managers, IROs will have to market to a greater number of independent research houses and asset managers directly without neglecting the surviving sell-side analysts. This will present a resourcing issue for which corporates will need a higher budget.
The cost of corporate access
Much like research, corporate access is a necessary input into asset managers’ investment decision-making process. Rather than not depending on it at all, if MiFID II results in the explicit pricing of corporate access, asset managers will likely become more selective about who they meet with and when.
Consequently, corporates may once again have to assume more responsibility, this time by committing more resources to corporate access activities and getting in front of would-be shareholders who don’t come knocking on the door themselves. Meaning, the cost of corporate access would have to be shouldered by both asset managers and corporates, depending on who calls the meeting.
If asset managers splash the cash on research, so to speak, then the sell-side may continue to prosper and IROs can continue to leverage their relationship with brokers as normal. If, however, asset managers are more careful with their spend on research and corporate access, sell-side analyst numbers may dwindle — and corporates may want to review their budget in preparation for life with a weakened ally. It will be up to the IR team to assume responsibility for direct marketing and enlist external specialist support.
On July 3, 2017, MiFID II is to be transposed into the national law of all member states, and by January 3, 2018 it will become a reality for all member states. So as the sell-side and asset manager negotiations progress and all entities work to become MiFID II compliant, the race is on for corporates to make sure they have the right tools and resources in place to ensure they don’t get lost in the aftermath.
Amit Sangvhi is the senior director, international advisory at Q4. Based in London, UK, he’s passionate about how technology can change the face of shareholder ID in Europe. You can follow him @4mits.