The new world of MiFID II: Unintended Consequences
23 April 2018
QCA/Peel Hunt Mid & Small-Cap Investor Survey
MiFID II is, without doubt, the most significant regulatory change to impact the financial markets since the ‘Big Bang’ in 1986. However, despite long running preparations ahead of its implementation in January 2018, nobody quite knew the effect that MiFID II would have on the City of London and the companies and investors it serves, or just how far reaching its implications might be.
Before it came into force, Peel Hunt knew that MiFID II would transform the way that independent research was accessed, including tougher scrutiny of research costs for fund managers. Peel Hunt were concerned about the unintended consequences of this regulatory change, particularly among mid and small cap quoted companies, who are usually the last to feel any impact.
Many believed it would lead to a decline in research spend and output across the industry, damaging market efficiencies and clouding transparency, with only the most relevant analysts in the City likely to survive.
Peel Hunt and the QCA commissioned YouGov to bring together the views on MiFID II of over 100 UK-based small & mid-size company focused fund managers. The results of the Investor Survey show many of these fears are becoming a reality.
Despite only being in place for three months, there is already a perception among UK fund managers that MiFID II is having a detrimental impact on small to mid-cap quoted companies in particular, reducing the quality and volume of research written about them, impacting their visibility in the market and restricting liquidity in their shares, which will ultimately hinder their ability to access capital for future growth. Corporates MUST ensure their corporate broker has the ear of the buy side to ensure broad distribution of their investment case.
Time will tell what other unintended consequences emerge.
Key findings of the survey:
● Nearly two-thirds (63%) of fund managers see the overall impact of MIFID II to be negative.
● 70% think MIFID II will result in less research being produced on small and mid-cap companies in the future, and nearly half (48%) already see less research being produced in these companies.
● 45% think that MIFID II will result in lower quality research on small and mid-cap companies.
● 74% believe that MIFID II will directly lead to corporate websites becoming more important sources of information for investors
● 54% believe that MIFID II will negatively impact liquidity in small and mid-size companies. Only 16% think this will be positive.
What do the results mean for companies?
MiFID II is proving to be the single most impactful change on the public markets for the last 10 years.
For small and mid-size quoted companies, important points to note are:
1. Your website is going to become a more important source of information for investors - the impact from MIFID II on the availability of small and mid-cap research means that investors will increasingly look to corporate websites for information.
2. You need to know if your broker is able to distribute research about your company to investors and potential investors - Asset managers previously received research ‘free’, with the cost built into trading fees paid for by fund managers’ clients. Now, under MIFID II, fund managers must pay for research and trading costs, reducing demand for services traditionally offered by institutional [and corporate] stockbrokersRead the full results of the survey here