The UK’s corporate access debate could have far-reaching effects
The nature of corporate access in the UK is undergoing a potentially profound change. These developments could affect the way UK asset managers interact with all listed corporations globally, not just UK companies.
Although final guidance from the UK’s Financial Conduct Authority (FCA) is still to be determined, the focus is certainly clear: UK asset managers are not to use client commissions to pay brokers for arranging corporate access. Because demand for face-to-face meetings between corporations and the buy side will continue to be strong, however, both sides may have to find new ways of arranging interactions.
For many IR teams, that will mean taking on more of the responsibility for targeting and identifying UK investors, as well as arranging meetings with them.
Dear CEO
Corporate access – and how it is paid for – has become a hot topic in UK financial circles over the past 18 months or so. But the way in which the debate made its way up the regulatory and political agenda owes much to chance rather than design.
In October 2012 the financial regulator sent a letter to UK asset managers regarding the treatment of conflicts of interest. The paper, which became known as the ‘Dear CEO’ letter, did not attract much attention at first, other than from those who had received it. Chief executives at asset management firms simply needed to attest that conflicts of interest were being handled properly within their companies, including following FCA regulations relating to payment for corporate access.
In fact, the topic of corporate access was a minor feature in the ‘Dear CEO’ letter – almost a footnote. In the months that followed, corporate access and how fund managers pay for meetings with company executives rapidly became the key issue, and received extensive attention in the financial media.
In November 2013, just over a year later, the FCA issued a document setting out a number of proposals relating to corporate access and invited the industry to respond. These proposals included:
- That corporate access could not be paid for via commissions, and that only ‘substantive research’ qualifies. In other words, dealing commissions paid by the buy side to brokers could be for trading and research services only, not corporate access
- That the buy side could continue to pay for corporate access but would have to do so out of its own management fees, not from the commission pool
- That corporate access be broadly defined as ‘a service of arranging or bringing about contact between an investment manager and an issuer or potential issuer’.
At the time of writing these remain proposals, rather than the FCA’s final decisions, but these points have become a de facto standard for UK buy-side firms. A number of parties have commented publicly on the FCA’s consultation paper, including the Buy-Side Investment Management Association and the Investor Relations Society.
Many comments focus on the need for greater transparency regarding who is paying whom for corporate access services, and how much. Others warn of adverse outcomes, such as additional costs for small companies that have limited budgets and already struggle to attract meetings with investors.
Making adjustments
Regardless of the outcome of the FCA’s consultation, the direction of travel is clear: the market for arranging non-deal roadshows in the UK is changing. The management teams of major buy-side firms do not want to pay for it, even without regulatory intervention. They believe the weight of their assets under management should be a big enough attraction to meet with company management.
According to Extel, which tracks financial players’ interactions, essentially all UK asset management firms have already removed the corporate access category from broker votes (the system by which the buy side allocates commission dollars to the sell side). In addition, a number of buy-side firms – Norges Bank and Fidelity among them – are now looking to arrange access themselves, rather than via brokers.
On the sell side, a number of corporate access teams have been downsized or merged into research departments, though other brokers report continued growth in demand for non-deal roadshows in both London and Scotland.
One comment we’ve heard from companies is that UK asset managers may simply ‘get around’ any new regulation by paying their brokers for other services – using corporate access services but simply labelling them ‘research’, for example. We believe this is unlikely given the FCA’s level of scrutiny of the topic, and the genuine desire on the buy side to align with both the spirit and the letter of regulations.
It remains to be seen how corporate access will be run if banks do not have a clear payment mechanism from the UK buy side in the future. Given the depth of the relationship between asset managers and the sell side, however, brokers may continue to provide meeting services, even in the absence of explicit payment.
It’s important to remember that these proposed changes could affect all companies that look to meet UK investors, not just UK companies. UK asset managers could be prevented from paying for corporate access using commissions, no matter where the company comes from or where the meeting takes place. Most major global companies look to meet investors in the UK at least once a year given that asset managers there have $4.7 tn of equity assets under management, making London and Edinburgh two important roadshow destinations.
What these changes mean for IR
For many IR teams with UK-based shareholders or prospective investors, the process of arranging corporate access is likely to change, irrespective of further proposals by the FCA.
Brokers will likely continue to offer corporate access services: the demand for meetings is such that the buy side will expect to be offered meetings with company management members when they are in town. But IR teams may have to assume more responsibility for targeting and identifying UK investors, contacting them and setting up the meetings. IR teams will likely also have to spend more time gathering feedback from UK investors.
Despite the additional work, however, the roadshow process in the UK will remain worthwhile for most international companies, in terms of the purchase potential of the investors and the convenience of accessing so many investors in a relatively concentrated area.
Chris Collett is vice president of corporate solutions at NASDAQ OMX, a provider of investor relations solutions including IR intelligence, investor targeting and webcasting. The opinions expressed in this article are those of the author and do not reflect those of NASDAQ OMX.
