Five industry insiders talk about the new corporate access rules from UK regulator the Financial Conduct Authority (FCA)
Our insiders are: a broker from a global investment bank, who wishes to remain anonymous (AB); Sandy Bragg (SB), president & CEO of Integrity Research Associates; Guy Gresham (GG), head of global IR advisory at BNY Mellon Depositary Receipts; Laura Hayter (LH), head of policy and communications at the UK’s IR Society; and Mike Webb (MW), head of equity investment operations at Fidelity Worldwide Investments.
The Financial Conduct Authority’s (FCA) update is a good thing – but not necessarily for everyone
LH: Better transparency on costs should result in more productive and quality engagement between issuers and investors. Corporate brokers will provide better institutional targeting, higher-quality roadshows and a focus on longer-term shareholders if fund managers are more selective.
MW: It puts more emphasis on asset managers to manage budgets more rigorously and be more transparent about their use of commissions. That’s definitely a good thing – and something we at Fidelity have gone to great lengths to do over the last several years. If it provides more clarity for investors about how their money is being used, that has to be a good thing.
LH: We don’t see it as appropriate in the engagement process to have a full shift of the cost burden of corporate access onto issuers, who already face a substantial and costly compliance burden as well as time and resource constraints. Meetings between management and investors are of benefit to both parties so costs should be shared.
We are particularly concerned that small and mid-cap issuers are not disadvantaged: typically, smaller-cap issuers with fewer in-house resources have to rely more on the services of corporate brokers. There will also be consequences if investors overall pay less for access as this may reduce the extent of the services brokers are prepared to offer. This again would disadvantage smaller companies that rely more on their services.
AB: Some people think this is just about setting up meetings and getting the CEO from A to B. But because we’re on the trading floor, we can and do offer insights – we’re there for an IRO when his or her CEO or CFO comes in and asks why the stock price is up or down 3 percent, or we give insight into fast-moving developments on the buy side. These are not services an IR consultant can easily provide.
Go it alone, turn to tech or keep the broker?
LH: Meetings don’t have to be arranged through an intermediary – they can be set up directly or through other emerging web-based channels. This limits any potential for UK investment managers to find themselves at a competitive disadvantage to their overseas counterparts. In recent years we feel the quality of some services offered to companies has diminished with the result that we have already seen large firms stepping up their own internal resources for investor targeting and roadshows.
MW: I think the reason we were keen to go with ingage and to help it get some traction is because we like that its model is completely unconflicted. It’s very clear that its service is there to administer meetings between companies and investors – that’s all. And it does that very well. [With the broker model] there’s obviously a lot more room for conflict, and one concern we have is that this model gives brokers the ability to charge for those services, even though it’s not always clear what they’re doing to earn their fee.
SB: I think there will be some innovative technology approaches to this. Ingage is one option but there are also videoconferencing firms like OpenExchange, affiliated with Ipreo, which is trying to make it easier to manage videoconferences and virtual conferences.
GG: From the issuer perspective, we have been seeing a steady increase in the amount of investor outreach companies are facilitating themselves. This hasn’t been driven purely by the companies but rather by a decrease in what the brokerage community has been providing over the last few years.
Far-reaching regulation?
AB: There has been clarification in some areas but, in others, questions remain. How should multi-jurisdictional investors think about these rules? Investors are still worried about the possible disadvantages they face when only the UK has adopted these new rules.
MW: This is one area where we might have hoped for a little more clarity. For a global asset manager, the rules around the world can vary massively. If you’re running a global business or running a US equity team from London, as we are, that causes some complication. The stance we’re taking is to adopt a global approach, partly because we think it’s the right thing to do but also because we feel it’s probably where regulation will move to in the coming years.
SB: We’re hearing from various parties in the US that some larger long-only managers will probably adopt internal rules consistent with the FCA guidelines so there is a subset of asset managers that will ban the payment for corporate access using client commissions on a global basis. But most US asset managers will continue to pay for corporate access with client commissions – provided those assets are sourced in the US and not in the UK.
The final rules seem to go a little further than what was initially proposed, in that there is much more explicit guidance given on bundled research and how investment managers will need to start to unbundle that. One of the remaining gray areas is the extent to which you can pay for conferences with client commissions.
MW: It’s [the FCA’s] role to make sure the position in the UK is clear but I think it’s also very aware that in Asia, and particularly in the US, practices around the use of commissions and the way corporate access is bought are almost the polar opposite to how the UK is moving. I think [eventually] there will be harmonization, certainly across Europe, and possibly parts of Asia, with people trying to remove as much conflict as they can.
SB: I think the FCA’s actions will have an influence on European regulators but are unlikely to affect the SEC yet. There would have to be some impetus – in the UK there was a lot of media attention – but as far as I know there’s no real pressure on [other] regulators.
Looking to the future
LH: The IR Society is advising its issuer members to keep closely involved with investor targeting and roadshow meetings in order to ensure maximum efficiency in the use of management time. We also encourage our members to keep pace with new technology to connect with new investors and their financial audience.
MW: Our budget-setting process has always been separate from the way we generate commissions – there’s a firm distinction between the people who govern the generation of commission and those who govern how that commission is spent on research.
For me, the most important area to focus on – and I think the area where the FCA is looking for people to be responsible – is how you manage your budget: apply the right degree of governance, make sure it isn’t delegated to too junior a member of the organization and make sure you challenge and ask questions. So if services are being procured, make sure there’s evidence of an audit trail showing you checked the service complied with the rules – and whether you agree that it did or it didn’t. That’s where a lot of our focus has been.
AB: The onus is on the buy side to adhere to the new rules. The regulator wants greater transparency on the way the buy side spends commission dollars to ensure it is treating its clients’ money as it would its own. And the sell side is trying to be helpful in providing information. But in terms of how we operate, it’s really business as usual.