Unintended Consequences

24th November 2014

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The regulatory proposal to change the method of payment for research, which form part of the MiFID II legislation, due to take effect across the European Union in January 2017, has stimulated an intense debate across the equity investment community.

Such changes are likely to have a considerable impact on the UK Small & Mid-Cap market and equally so on the quoted companies, the brokers and the asset managers investing in these stocks. Given the level of debate, Peel Hunt determined that an independent survey of the views of companies and investors would help to inform an understanding of the impact of the proposed changes. Peel Hunt chose to work with Extel on the survey due to their expertise in this area and reputation for rigour and independence. The survey was undertaken from October to November 2014. Some of the key findings are outlined below:

UK companies: less research, less liquidity and less access to capital markets

  • 85% of buy-side respondents fear a decrease in the number of analysts publishing on Small & Mid Cap companies.
  • 74% believing the proposals will adversely hit liquidity of Small & Mid Cap stocks.
  • 84% of buy-side respondents believe that the MiFID II proposals will affect the ability of Small & Mid Cap companies to access capital markets due to the reduction in liquidity driven by reduced sell-side research coverage.
  • 78% of quoted companies responding see a correlation between the number of analysts writing on their company and the liquidity of their shares.

Fund managers: barriers to entry, competitive disadvantages, penalising end consumer

  • 84% of buy-side respondents think MiFID II proposals will raise barriers to entry for new asset managers to start up and force further consolidation giving the consumer less choice.
  • 86% of the buy-side respondents believe that there will be a greater impact on smaller asset managers compared with the larger managers.
  • 32% believe the proposals would lead to higher fund charges.

Research: asset managers should pay for research and cost should be related to value created

  • A preponderance of asset managers and corporates feel that asset managers should pay for investment research.
  • 70% of the buy-side believe the cost of research should be linked to the value it creates.

The results of this survey highlight the serious concerns held by the companies and the investors over the unintended consequences these regulatory proposals are likely to have on UK Small & Mid-Cap companies, investors, asset managers and brokers.

To have 161 buy-side individuals from organisations controlling in excess of £1.7 trillion is a genuinely significant representation of industry views and a clear illustration of the strength of feeling held by the asset management industry. Similarly, to have 69 responses from the great and the good of quoted companies shows just how seriously they are taking these proposals. It is not an exaggeration to say that corporate boardrooms are largely unfamiliar with the machinations of financial services legislation therefore the impact of a reduction in research coverage and the subsequent knock-on effect on potential capital markets activity will likely be felt too late. This survey is intended to bring all the issues to the forefront and stimulate continued debate.

This article was prepared by Peel Hunt. To view the full report, please click here or alternatively contact Rachelle Cornel at Peel Hunt. 

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