Investors and companies call for UK to replicate EU changes to Mifid II unbundling rules

Mar 12, 2021
Study finds investors and companies have different views on capital markets days

The UK should follow the EU’s lead and ease Mifid II unbundling rules for small and mid-caps, according to a survey of investors and companies.

Mifid II, introduced at the start of 2018, banned the use of trading commissions to pay for equity research. But last year the European Commission said it would relax the rules for companies under €1 bn ($1.2 bn) in market cap, saying it wanted to remove ‘burdensome’ requirements.

Now there are calls for a similar move in the UK. A majority of investors (78 percent) and companies (73 percent) want the UK to replicate the exemption proposed in the EU, finds a survey by the Quoted Companies Alliance (QCA) and Peel Hunt.

The research, conducted at the end of last year, received around 150 responses from UK-based investors and small or mid-cap companies.

Tim Ward, CEO at QCA, says he would welcome an exemption from unbundling rules for smaller companies in the UK. He acknowledges that brokers have changed their systems to be Mifid II-compliant and may not want to switch them back or use two different models for research payments. 

‘But there are quite a decent number of small and mid-cap brokers that may well want to adopt an unbundled approach because their main target audience is all about small and mid-caps,’ Ward tells IR Magazine. ‘If you allow brokers to offer an unbundled service, it allows different models to be developed.’

Ward says another benefit to relaxing the rules would be to allow more conversations between brokers and investors about companies. The need to have a Mifid II research agreement is hampering interaction, he says.

European lawmakers approved the changes to Mifid II in December as part of a Covid-19 relief package. Under the proposals, investors can bundle research and trading costs if they enter into an agreement with the research provider and inform clients. 

While Mifid II is often blamed for a drop in small-cap research coverage, studies have cast doubt on the role of the directive. A working paper by the European Securities and Markets Authority, released last month, finds ‘the quantity of research per [small to medium-sized enterprise] has not declined relative to larger firms’ since the implementation of Mifid II.

And IR Magazine data suggests research coverage of European small caps actually rose slightly between 2019 and 2020.

The Financial Conduct Authority, the UK’s financial regulator, did not comment on the new survey’s findings. In a 2019 review of Mifid II unbundling rules, the regulator said it found ‘no evidence of a material reduction in research coverage, including for listed small and medium-sized enterprises.’

Regardless of the impact of Mifid II, it’s widely accepted that research coverage of small and mid-caps has been on a downward trend for several years. The shift has led a growing number of companies to consider issuer-sponsored research as a way to get on the radar of investors. 

The QCA and Peel Hunt survey asked investors how useful they find sponsored research compared with information from an ‘independent source’. In response, 45 percent say sponsored research is ‘a little less useful’ and 17 percent say ‘a lot less useful’. One in five respondents think both types of research have equal value.

Most investors and companies say the UK market played an effective role in supporting businesses during 2020, when many needed to raise capital, according to the survey. But they have concerns about the future of London as a listing venue. 

Just 21 percent of investors and 5 percent of companies think the number of listed companies will rise in the coming years. Cheaper financing options and tough regulation are among the main reasons why companies are not going public, say respondents.

The research took place before the publication of the Hill Review into the future of the UK equity market, which came out last week and proposes a major overhaul of UK listing rules to attract more IPOs.

A further finding is that investors appear to value capital markets days more highly than companies do. A majority of investors (71 percent) say such events are one of the best ways to increase visibility with the buy side, but only 28 percent of corporate respondents agree.

While capital markets days take up a lot of time, they allow investors to really get to know the company, says Ward. The buy side can ‘meet more people’ and get a ‘wider perspective’ of the business, he adds.

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