Dealing with a seismic change in regulation

When MiFID II is introduced, IROs will find themselves in the middle of some major regulatory changes, as Ian Shackleton reports.

The European broking and investment management industries are likely to face a seismic change as the MiFID II (Markets in Financial Instruments Directive II) regulations come into force in the European Union in January 2018. 

In the last few months there has been an active debate going on about how the relationship between the broker/sell side and the investor/buy side will change. It is difficult to argue against the notion that the unbundling of charges made by the brokers to the investors is likely to result in less sell-side research and less analysts, where there is already pressure, given the margin squeeze on the investment managers as their fees also come under pressure. 

This unbundling could also affect the provision of corporate access by brokers, which has traditionally been part of the service offered to investor clients. Not surprisingly, this process is leading to detailed negotiations between the brokers/banks and their investor clients, and it will take some time for all the details of the new industry model to become visible.

There has been less debate so far about what all this means for corporate investor relations, as well as on the total communications function within a company. Given that little has changed so far in the services offered by brokers, there may be a risk of companies becoming too complacent about the status quo.  I do hear some concerns from mid-cap companies that, if research coverage on their company declines, this could lead to inadequate market commentary; on the other hand, several FTSE100 IROs appear to be looking forward to seeing the number of sell-side analysts which cover their company coming down to a more manageable figure. 

Wider implications
However, there are much wider implications. If there is no sensible consensus of analysts’ expectations, it may become less meaningful for a company to give an outlook statement where ‘trading is in line with expectations’, implying that more specific guidance may need to be given in future. In addition, research distribution and analyst availability are already being restricted due to stricter compliance; MiFID II is likely to exacerbate this further, raising the question of who will provide the added value commentary to the media, say on a results day or an M&A announcement?

For IROs, the ascendancy of the buy side, at the expense of the sell side, should lead to a de-emphasising of results reporting (in the post-MAR world, results are likely to produce less surprises, in any case), replaced by a requirement for more background materials on the company website, as well as the provision of more added value research, through, for example,  capital market events. On corporate access, companies need to evaluate what will be best practice for the future, which may mean bringing this function in-house, or using a specialist provider, rather than the traditional broker model.

All of this is likely to increase the workload, and the costs, for companies in investor relations. However, it also has implications for how companies assess their wider communications with all stakeholders. 

For example, if the media is going to be less informed as its interface with analysts becomes more restricted, is it up to a company to try to help provide some more objective commentary on its industry and operations?  And to make life even more difficult for the companies, they do find themselves at the end of the food chain in the MiFID II debate; it is up to the investors/buy side to put in place MiFID II compliant systems and decide what they will pay the brokers in future; this will allow the brokers to react and reconfigure their business models in line with the new economics. 

Only then will the companies be able to fully assess the impact of MiFID II on their way of life; however, now certainly is the time to be considering the future. 

Ian Shackleton is principal, financial & corporate, at Bell Pottinger.

Published 20 July, 2017

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