Spotlight on regulations, part 2 – MiFID II

In our second ‘spotlight’ on regulations, we get to the bottom of MiFID II and what it means for you.

So, what is MiFID II in a nutshell?

Following the 2008 financial crisis, the European Union took unprecedented regulatory action in the form of the ‘Markets in Financial Instruments Directive’ (MiFID). MiFID II was created to increase transparency in financial markets, and ensure firms act in the best interests of investors. The most recent raft of changes, to be implemented in January 2018, provides an enormous short-term challenge for many companies. However, it is our view that over the coming years, the benefits of increased transparency will be viewed positively.

What does ‘research unbundling’ mean for my company?

‘Research unbundling’, a main facet of MiFID II, stipulates that buy-side firms will have to pay an explicit cost for research where currently this information is included within brokerage commission. This is likely to be an enormous challenge for both buy and sell-side firms, who may struggle with increased research costs. A number of large firms have opted to absorb these costs and continue to offer research free of charge. For small to mid-sized firms, this is not considered a viable option.

Buy-side companies may be cynical about the idea of paying for information that was previously free. Some may opt out of buying research, probably to their detriment. Investment companies who employ the best researchers may gain an advantage over those who shirk research. Quality research is likely to be a deciding factor when private investors are considering where finances are best placed.

As the price of research grows, it is increasingly likely that buy-side companies will grow more critical of sub-standard or biased information. Information the sell-side provided, prior to the directive, was not always provided in the best interests of the buy-side. If the sell-side can’t produce information deemed to be truly worthwhile, we are likely to see a growth in diversified and specialist research institutions. This would allow for research tailored to the buy-side’s needs, while also being available at a lower price.

What role will this play in my investor engagement?

The importance and relevance of the annual report and corporate website is only likely to grow as reliable research becomes more expensive. In our view, there is potential for more investment decisions to be based upon the annual report rather than research, especially for small and medium-sized companies. In creating an annual report that is more transparent, and with a clear investment case, the effects of reduced information on investors will be mitigated.

I’m still confused!

If you would like more information on MiFID II and its possible consequences for your business, please email [email protected]

 

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Stephen Butler

As Investor Engagement Director, Stephen leads a team which provides strategic, best practice and compliance advice to clients across narrative reporting, digital, investor events, sustainability and integrated reporting.