Problems caused by MiFID II
MiFID II
I've heard a lot of discussion, and moaning, from my friends & contacts in the City over recent months, concerning the apparently onerous regulatory changes being introduced by the EU's MiFID II (Markets In Financial Instruments Directive). This is a European Directive, but before Brexiteers get over-excited, apparently UK regulators had major input into its drafting.
The intention behind Mifid II seems to have been to make investment markets more transparent, and for consumer protection. However, from what's happened so far, like a lot of regulations, the actual impact seems to be the opposite of what was intended.
Probably like most of you, I've recently had letters from my various brokers, asking me to sign bits of paper. I didn't really pay a great deal of attention, as admin bores me. However, my main broker just said that the new rules would restrict my access to research notes, so the easiest thing would be if I requested to be registered as a professional client. This means giving up some protections, but I went ahead with it anyway.
Segregation of Funds
My main broker (Spreadex) segregates all client funds already, whether they are retail or professional clients. Plus, my view is that if fraud were to occur with any broker, then the rules over segregation of funds would probably be flouted by determined fraudsters. So it's questionable whether this supposed protection for retail clients would actually be adhered to in a broker meltdown type scenario. I've always thought that the best way to protect against fraud or some unforeseen broker collapse, is to spread your money around several financially strong brokers.
Companies House
Plus, I always check the published accounts of brokers, which you can do free, for any UK company, at companies house website here - well worth bookmarking that page - I use it a lot. Spreadex has a strong balance sheet relative to its size, so I'm happy to leave most of my family's money with them. Larger spread bet companies IG Group (LON:IGG) and CMC Markets (LON:CMCX) also have strong balance sheets.
Companies House website is also useful in everyday life, e.g. when paying deposits to builders or other contractors. It's worth checking Companies House website, to ascertain their financial strength & how long their company has been around, before parting with your money. I learned this lesson the hard way, after losing my deposit when ordering some blinds, and the company went bust before anything was delivered. Had I checked their accounts beforehand, I wouldn't have given them any money up-front, as they were obviously insolvent. Paying on a credit card is also a good idea in this type of situation, as that affords some consumer protections, I believe.
Intermediary broker for spread betting
I've found that spread betting accounts are too dangerous to be under my control. Money constantly leaks out of my accounts due to my stupid punting on indices, and other things. I dread to think how much I lost in my IG accounts last year, punting on Bitcoin. This has tended to dissipate all my small cap gains, unfortunately, and it's really down to a character flaw in me - I enjoy punting, but am rubbish at it! However, my core small caps stock-picking is usually very successful. So my key aim is to focus on the small caps stuff, and stop or at least curtail my punting.
Therefore, I found a neat solution - I use an intermediary broker to work my orders, and then place the small cap trades only on my family's Spreadex account. To stop me doing anything compulsive & stupid (i.e. punting on indices, etc), I asked for the Spreadex website to be put into read-only access for me. Therefore I can monitor exactly what's going on, but I can only place trades by phoning up my intermediary broker to request he places a trade for me. I'm usually too embarrassed to ring up requesting punts, so they rarely happen.
Putting this firewall between me and the dealing interface has been astonishingly effective, as it stops me punting on the Spreadex account. If I told you the % gains that have been achieved on the Spreadex account in the last 2-3 years, you just wouldn't believe me. Think BMUS returns, turbocharged with gearing of 2-3 times. So we're talking over 1000% gains in just over a couple of years. Obviously the clever bit will be hanging on to those gains in the next bear market. Given my track record of spectacular gains (2002-2007), then blowing up in the crash of 2008 (due to being geared up on illiquid stocks that I couldn't get out of), I'm very mindful of the risks, and how to avoid repeating the same mistakes this time around.
How did we get on to this? Oh yes, so I talk to my broker a lot - multiple times per day in fact, as there's nearly always something interesting going on in the market, and I am constantly finding new investment ideas, as a result of ploughing through so many trading updates & results statements, written up in the Small Cap Value Reports.
If you're constantly buying new stuff, that means that you also have to be constantly selling old stuff, in order to free up cash for the new purchases. Hence I'm probably a more frequent trader than most people, whilst also keeping lots of my main positions for the long term (2 years+). I've never seen the need to identify as a trader or an investor - I like to do both. If there's an opportunity for a quick profit, on some game-changing news, then why not grab it? I don't see slow gains as being somehow morally superior to fast gains. Surely fast gains are more attractive? Generally I only buy shares where I see 50%+ upside. If that price goal is achieved in a month or less, then that's fantastic. If it takes a year or two, then that's good, but it's tied up my capital for longer, so that's less appealing than a faster re-rating. Also, some companies I like to hold forever (providing the newsflow remains positive). One position I've held continuously for 14 years!
Broker notes
Given that I talk to my broker a lot, and he earns quite a lot in commission from me, then he is very helpful in sending me broker notes each morning, on stocks that he knows I'm looking at. Having used the same person as my broker for almost 15 years (through 3 companies), he knows exactly what type of shares that I tend to like. Also he helps me greatly with my SCVR-writing, by emailing me relevant broker updates on small cap companies which are reporting that day. So I can incorporate changes in broker forecasts into my reports, and thereby inform SCVR readers who may not themselves be able to get hold of forecasts in such a timely fashion.
It's worth noting that Research Tree is a wonderful service, which I also find very helpful in providing me with some broker information. I very much hope that more brokers sign up to provide their research to a wider audience via Research Tree. NB - for the avoidance of doubt, I have no commercial relationship whatsoever with Research Tree, I just find it a useful service, so am happy to recommend it.
MiFID problems
Anyway, last week we ran into MiFID II problems. I was looking at a company that a friend recommended to me, so I emailed my broker as usual, to request broker research on it. The response, for the first time ever, was, "Sorry Paul, we've got some research on it, but unfortunately compliance won't let me send it to you, because of MiFID II". What a bloody nuisance! That has brought my research process on a potentially interesting company to a shuddering halt, as I don't now have any estimates for future profitability for this company. There isn't enough information in the public domain for me to make my own profit forecasts, so it's now impossible for me to value the company - as valuation hinges on future profitability.
EDIT - just to clarify, registering as a professional client helped me maintain access to only some, but not all research. End of EDIT.
I accept that broker notes are often wildly wrong, in terms of profit forecasts, but at least it's a starting point. Without any forecasts at all, buying small cap shares is just going into the realm of punting, guesswork. That makes it a lot less likely that I will buy a share. So I feel this could have serious implications for the UK small cap market, in curtailing activity. If we can't get hold of research, and there are not even any published consensus forecasts available on websites such as Stockopedia, then I think small caps might see reduced investor interest, which would harm liquidity & the attractiveness of investing in small caps.
Access to research
My broker briefed me on how MiFID II has changed things. Apparently the principle is now that research activity of brokers (i.e. producing research on listed companies) now has to be separated from commissions earned from client trades. Tamzin at PIworld.co.uk published an interview with Rob at Research Tree, explaining the issues around MiFID II. The subject matter is rather dry, so I had to watch it twice for it to sink in.
My broker tells me that he's had a series of negotiations with the big research providers, as they now need to charge for access to their research. Individual research brokers are asking for typically £10-20k each, for my small broker to access their research. The trouble is, some of them won't then let him email their research on to his clients such as me! (even though I'm registered as a professional). Obviously, he has declined those invitations. That has now shut off a useful source of broker notes for me & other clients. So MiFID II is now actively harming my interests, not protecting me at all.
My broker can still email me some broker research. However, this is now generally limited to house broker notes, which are classified as being marketing promotions, paid for by the company, I think. So house broker notes are now classified as commissioned research. There probably won't now be anyone else publishing research on many small cap companies.
Commissioned research
So, broker research, especially on smaller caps, now seems to be reducing considerably, and access to it is being greatly restricted by MiFID II. This means that commissioned research from Edison, Equity Development, and others, is likely to become much more important. Personally I like commissioned research. This is effectively the company's own forecasts, being published through an intermediary. It will generally paint an optimistic picture of course, so I usually adjust the figures down a bit in my mind, when deciding whether or not to buy any share. Also, I always completely ignore buy/hold/sell recommendations, which are totally meaningless. Price targets are also usually best ignored, although sometimes can be useful. Research notes on speculative companies is nearly always pie in the sky, but I rarely invest in blue sky type shares, so that's not a concern for me.
It's the main content (narrative) & forecasts of broker research which are the important, useful bits, which often inform & educate on a company's operations, and sector. We can tweak their numbers, to arrive at more cautious forecasts ourselves, which is easy enough to do. In that way investors can easily construct a series of forecast scenarios ranging from optimistic (what the research note says), down to pessimistic (e.g. adjusting sales down by, say, 10%, leaving overheads unchanged, and seeing what profit number drops out).
Hopefully there might be an increase in commissioned research, to plug the gap which is now being created by MiFID II driving down the amount of other research being produced.
Email from Brian Basham
Brian is a PR guru, who pretty much wrote the book on financial PR, and was embroiled in all sorts of big corporate battles in the 1980s. So a fascinating, highly experienced, and influential figure, to this day. He's mellowed a lot since those swashbuckling 1980s, and has been a great friend to me over the last 10+ years - giving me lots of wise counsel, support, and many enjoyable discussions over long lunches! Behind the scenes, Brian has been very actively campaigning on many important issues, such as banking regulation, bad corporate culture, to protecting rural pubs, and was instrumental in restoring the two minutes' silence on Armistice Day.
Anyway, whenever there are important issues under discussion in the financial world, I often receive illuminating emails from Brian. Yesterday he sent me one such email on MiFID II, having seen my comments on it in this week's SCVR. I thought the points he made were so interesting, that they deserve a wider audience. So I asked (and was granted) his permission to reproduce his email below, so here it is;
Many thanks. MiFIDII is ridiculous overkill. It stems from the 2008 banking crisis and the FCA, its principle author, has seized the chance to get its regulatory nose deep into the investment trough, even though there has been no major investment fraud other than Madoff and that had nothing to do with broking.
However, it forces transparency and that was at to root of my thinking when I started ED [note: Brian founded, and currently owns Equity Development] . In a way MiFID has just caught up. Sadly, though, it puts all the power in the hands of the big banks.
I have long believed that quoted companies should regard research as a listing cost. They should be obliged to commission and pay for research by authorised providers on the grounds that they have an obligation to keep their shareholders informed. The providers should be voted on at the AGM, just like auditors.
Research should be provided twice a year for small companies and four times a year for majors. Of course providers would come under pressure but at least the process would be transparent and the shareholders would have a role in judging the outcome. From long experience, it’s my view that any other process is open to pretty serious corruption.
I then replied to Brian's email as follows;
Hi Brian,
Yes, I very much agree with you. I wonder how many of the people creating all this regulatory stuff (Mifid II is apparently 1.4 MILLION paragraphs, and still rising) have any experience at all of working in or using the financial markets?
Regulation seems to actively work against the interests of private investors, by stopping us getting hold of research. Madness! Hopefully an opportunity for ED.
Regards, Paul.
I then received the fascinating reply below, which I emphasise Brian has given me permission to publish (at my request, as I think his thoughts deserve a wider audience, and to stimulate a discussion) - I would not dream of publishing any emails without specific permission from the sender.
Paul,
Sadly I think that the people who actually write this stuff DO have deep experience of working in financial markets. They are the big banks who know that complex regulation crushes those small businesses that might grow to become competitors.
The giants know that they can employ grunts by the barrow load to navigate the regulatory maze, leaving the movers and shakers free to make money.
When it comes to small companies, the burden of regulation usually falls on the CEO or FD and that inhibits the growth of the business. Just look at the business I ‘invented’, Archover. Regulation tied up the CEO Angus Dent for months. Now that it’s an established business, it sees regulation as a barrier to entry for potential competitors.
As for the Government’s much vaunted support for ‘challenger’ banks and sources of finance, forget it. Crushing regulation will ensure that it won’t happen. It’s a vile stitch up that is all the more unfair when you consider the comparison with the gambling sector. If I wanted to punt £10k on a horse, I’m sure I could find a taker no questions asked. The law accepts my right to take that risk with my money. If I want to do the same with a small company, I have to jump through all sorts of suitability and KYC hoops - I’m told that Rathbones are even subjecting clients to psychometric testing, just to protect their back.
There is no regard in that process paid to the resources available to the ‘punter’ to make a sound judgement and that’s just ridiculous. In both cases, the punter has his or her residual knowledge to rely on. In the initial assessment, the processes are remarkably similar. For a horse, the punter might look bloodstock line, the trainer, the jockey, the form of the other horses, the ‘going’; soft, hard etc and media views.
In the case of a company the punter can also look to the ‘bloodstock line’, as represented by the record of the principal promoter of the company; he or she can asses the reputation of the jockey, or CEO and can look deeply into the success or failure of other companies supported by the brokers to the business.
Finally an assessment can readily be made of the company’s competitive position and the state of the sector, loosely, the going. Media views, such as your own, can also be an invaluable guide.
But there the comparison ends. The only documentation available to the racing punter are publications like Timeform, which is totally unregulated and is even owned by bookmaker, Paddy Power Betfair. Contrast that with a public company, where even the most lightly regulated exchanges insist on companies providing a mass of information and where all companies are subject to the Companies Acts.
As a result investors have oceans of highly policed information available, starting with annual reports and accounts, interim and preliminary reports, highly regulated announcements on any price sensitive developments. They have the absolute right to attend annual general and extraordinary meetings to question the directors. The companies must maintain a web site and a register of shareholders and, until now, brokers and others published regular research.
We know that smaller companies are the backbone of the economy. I have long believed that the smaller quoted company sector, should be the pinnacle of the sector. Theoretically these are the companies that have survived scrutiny by armies of accountants, lawyers, finance houses, brokers and the chosen share exchange itself. Sadly, those companies are denied investment by crushing suitability regulation and now they will be denied information by Mifid2.
That’s a huge shame because we have an ageing population that needs to save to survive and the smaller company sector has not only performed well ,but the companies are entities with which people can identify. For the record in 2017 the FTSE Small cap grew 14.2 per cent whilst the FTSE 100 managed just half that at 7.1 per cent. It’s much the same picture over three years with small caps recording 35.4 per cent and the FTSE 100 growth showing 17 per cent.
That’s a huge shame because we have an ageing population that needs to save to survive and the smaller company sector has not only performed well but the companies are entities with which people can identify. Potentially, that’s not just good for the investors it’s also good for capitalism itself. It’s what your hero Thatcher tried to create with her privatisations- ‘popular capitalism’. Of course, punters, investors, call them what you will need to be educated but that’s the minority, there will always be idiots, gambling, investing, drugs, drink. It’s always wrong to regulate the system to accommodate the lowest denominator. Sorry about the rant but the whole FCA is f***ing ridiculous.
Under Andrew Napoleon Bailey they are leaning on the investment market as a whole in the wake of the 2008 crash despite the fact that it was a BANKING failure and nothing to do with investment!
They are not only ridiculous they are colluding with the banks they should be prosecuting, to destroy the real wealth creators, the small companies that are the soul and spirit of the economy.
Best B
Very interesting perspectives, I think you’ll agree. Brian has started Tweeting recently, and can be followed @brianbasham . I should warn you that he’s a socialist, unfortunately, but we all have our faults!
Other broker comments
Brian also forwarded some comments from his own broker/fund manager whose reaction to MiFID II is as follows;
Historically I would guesstimate that I received circa 300 emails a day, of which circa 250 were probably research-related in some way. We were under instruction that from MIFID2 D-Day on 3rd January we were not to receive any unpaid research work and must refer any questions in this regard to our compliance department.
From 3rd January the only pure research article I believe that I received was from Equity Development, which I referred to compliance and who responded and confirmed that it was okay to continue to receive
It seems to be the case that commissioned research is OK under MiFID II, but other research can only be received if it is paid for by the receiving party. That’s my understanding anyway. Therefore, a lot of research is likely to simply stop being produced. Maybe new commissioned research companies will pop up, to fill the gap in the market.
Conclusion
My feeling is that, from what I’ve seen MiFID II seems to have tried to fix problems that don’t really exist. What on earth was their thinking, in disrupting (not in a good way) the investment research market? The end result seems to be that investors will get a lot less research. How does that help us? Clearly it doesn’t. Still, the financial community is resourceful, so I’m sure companies will be looking for ways to get round these new regulations – maybe forming offshore companies that provide research on the internet?
Hopefully, post-Brexit, a future British Government might simply tear up a lot of the pointless and counter-productive regulatory burden on listed companies. I was going through the Annual Report of Carillion earlier today, and thought to myself what a load of useless garbage has to be included in Annual Reports these days. It must cost companies a fortune to produce usually over 100 pages of largely useless information.
I’m all for regulations in areas where it really matters – such as safety regulations that save lives. However, it seems to me that regulations in the financial space seem to mainly place unnecessary burdens on honest people, yet criminals seem to still get away with it.
So far, MiFID II seems to have back-fired. From the (admittedly limited) things I’ve seen so far, it has only detracted from my ability to source good quality information about companies.
What do other people think? I’d like this post to be seen as the starting point for a discussion on MiFID II and related issues, so please add your comments below. Does anyone think there are positive outcomes likely from MiFID II?
Regards, Paul.
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37 comments
My personal view on this is that the free broker research was worthless anyway.
An analyst who really understood the stock markets wouldn't be wasting his time writing research reports for a broker, he'd be trading for his own account and getting rich.
Despite making a mess of the investment research market, one advantage of MiFID II I can see is that SEAQ has been phased out and all stocks previously SEAQ have been transferred to SETSqx. I was never a fan of SEAQ as, in theory, market makers could collude to manipulate prices. With SETSqx non Market Makers can place orders.
Secondly the benefit and hence the value of a meeting is often months or years later. For an extreme example one of my most profitable investments last year was a company that I first met in 2000 in a meeting organised by a broker that I no longer speak to.
I'm not really sure why this is an issue. If you meet an analyst you should pay them for their time, and work, at whatever their going rate is as you pay any other contractor. Not for some estimation of what the future worth of their research may be. That may affect your decision on employing them, but not how you pay them.
Peter
One final point - the FCA is the lead regulator for financial services within the EU - so in practise if the FCA puts its foot down the EU will generally not pass a regulation. Sometimes the EU is blamed for regulation which may have originated out of London or that the FCA did not intervene or engage on early enough.
I have read the above comments with some interest.
There are various aspects to MIFID. Some are arguably beneficial to investors eg the aim to limit how much trading is done 'off-exchange' in dark pools etc (though that rule has been suspended for three months as some dark pools could not provide sufficient data - which in itself raises issue re whether dark pools execute beneficially for investors).
The part of MIFID that impacts investors most is the unbundling of research payments. I have some (slight) knowledge of how this was pushed through. At a previous brokerage we employed a consultancy to help us work out how to collect CSA (commission sharing agreements). One of the consultants particularly had an issue with how research was paid for without any formal contractual agreements. Over the years I have seen him make multiple presentations on this issue at various conferences and I know he presented at the FCA and in Brussels.
The issues I have for the institutional market are (i) we are moving from a relationship to a transactional model of research (ii) this fundamentally misunderstands the relationship of fund managers and analysts with research brokers and banks (iii) itemised bill may provide more transparency but alters behaviour and also is not the objective of end clients (iv) the model is different in different countries. I hate to say it but the consequences for retail clients and people like Paul Scott are, in some ways, 'collateral damage'. Let me address these issues in more detail below.
Relationalship vs transactional model:
The idea of Mifid is that if I meet an analyst I pay him the value I ascribe to the meeting. However in real life you rarely make a decision, when real money is involved, on the basis of one meeting. Secondly the benefit and hence the value of a meeting is often months or years later. For an extreme example one of my most profitable investments last year was a company that I first met in 2000 in a meeting organised by a broker that I no longer speak to.
Relationship between fund managers and research brokers:
As an investor I often do not fully 'trust' an analyst or a broker / saleman until I have met him / her a number of times. And I very rarely, if ever invest immediately following a single meeting, or on the basis of that one meeting.
However fund managers often underestimate how useful analysts and broker research is to get upto speed on a company.
Itemised billing:
There is a whole industry of consultants that have appeared to analyse 'TER' (total expense ratio) and fund allocations for institutional allocators such as pension funds, insurance funds and endowments.
I am frequently asked in meetings things like 'How high is your AUM turnover?' and 'What is your hit ratio?' My reply is I don't know and deliberately do not measure it as I am concerned that the more data points I try to record, analyse and manage the more distracting it will be. My objective I believe is straightforward - make investments that I think will make a return. Also cut if a company reaches my price target and I believe it has no more upside. Measuring, and therefore even if at a subliminal level, I start measuring my AUM t/o and hit ratio I believe it will impact my primary objective.
I am old enough and grumpy enough to say these things - but my fear is that a lot of younger fund managers are almost 'bullied' into managing their portfolios to please consultants and are thereby doing a disservice to the ultimate end client - ie the pension or insurance fund. Surely the key issue for any asset allocator is net performance. I appreciate the claims that performance one year does not reflect performance the next - but my experience is that there are some people who are consistent and others are not. (Also if performance does not carry through then what is the value of all the consultants - surely a client can invest in ETFs without assistance).
Other countries:
In the UK on AIM companies have a 'NOMAD' to whom they pay regular fees, some of which might be able to fund research. Other countries do not necessarily have a NOMAD system and fee income is often transaction driven rather than ongoing 'advice' and hence the funding of research may be less straightforward from the investment banking arm. In many banks 'research' per se is loss making but helps banks win mandates and also engage with buyside clients for their deals.
Private clients / smaller investors and common goods:
Because the marginal distribution cost of research is so low it has tended to be widely disseminated and arguably provided some degree of 'common good'. However, a bit like the story of the 'tragedy of the commons' it has meant that fund managers and even private brokers have undervalued it - and underestimated the time and effort it requires to write research. I have been on both the buy and sellside - and hate to say that though the buyside is very confident about their own skills, a lot of buyside 'research' is copy and paste - and a lot would not be allowed out by a good head of research on the sellside.
I think the FCA / regulators have not contemplated the benefit of the 'good of the commons' in how research was distributed historically. As I have mentioned elsewhere on this site one of the consequences is that the field is being tilted to favour larger and larger fund managers.
I wonder whether institutional investors might now turn up at AGMs of smaller companies,if they are otherwise going to have to pay for private meetings ?
I have rarely seen an institutional investor at an AGM .
How about companies tell us directly what their forecasts are and leave out the middlemen? Next (LON:NXT) seem to manage it, what stops other companies doing the same?
Or just admit that the future is inherently unknowable like Burford Capital (LON:BUR) do and decline to make forecasts to anyone.
This "managing market expectations" is a game that doesn't add any value.
I'm really struggling to believe that the EU has let a vested interest create regulation that stifles competition and increases regulatory costs for no obvious benefit.
#sarc
Re: Debate on MiFID II
Thanks for the discussion Paul, I found this very interesting. It is just part of ther crazily overegulated financial sector. Just over a year ago I had to spend over an hour on the phone to Skipton Building Society answering all manner of questions before they would allow me to change from one mortgage deal (which had just ended) to another similar mortgage deal. I appreciate the need to protect people but an hour of questions is total overkill. This was one of the reasons I invested in Mortgage Advice Bureau which has the necessary technology to sell mortgages efficiently. I was wondering if there are any listed small company beneficiaries of MiFID II. I would suggest that Fidessa may benefit, but that is hardly a smallcap.
What hope have we got. Been trying to move to AJBELL from Barclays Smarter Investor since last September. Still ongoing, with my SIPP portfolio now at AJBELL but the SIPP cash with Smarter Investor, One fund didn’t transfer as being told held up by MIFID 11. So until that’s sorted the cash remains with Barclays. Not traded since September as told if paperwork changed would have to start again. Damage done as couldn’t sell RBG on takeover so still holding and Pennon dropped like a stone. No longer any idea what the truth is as stopped talking to Smarter Investor long time ago and got my personal banker to take up the cause. Conclusions Barclays Smarter Investor if it ain’t broke don’t fix it and never apply change on change on change because we won’t know where it got broken. All the best peed of Fleurs
Re: fleurs, Barclays problems
Just to reinforce your comments about Barclays sharedealing services for smaller investors. As chairman of an investment club I received appalling and totally unsympathetic service from them and ended up taking them to the Financial Ombudsman. When everything is going smoothly you might think Barclays are OK, but when you have a problem like you are having, you find that their customer service is hopeless.
MIFID II is a classic law of unintended consequences situation. Mass confusion is likely for months.
However, it is worth remembering the status quo. E.g. There is right now very little independent equity research produced on most companies below 500m mkt cap. The house broker, a paid for house and maybe AN Other is usually all you have.
So things can hardly get worse in terms of coverage.
Availability of research might well be an issue, but the actual research production is already at low levels in small/mid caps. In mega banks, they don't care about small/ mid caps anyway.
Companies pay PR companies for some sort of coverage. But maybe this is money down the drain.
Do companies actually want critical, objective and independent research ? I bet they dont
Hi Paul,
I work within the institutional investment consulting space serving pension schemes and allocating their capital to investment funds.
This regulation is primarily targeting asset managers who up until now have bundled the cost of their research into their trading using commissions from execution with brokers. The issue with this is they hide this (often meaningful cost) as it is not in the management fee clients buy. Instead it gets hidden in the TER and there is a lack of transparency. This cost can be meaningful 5-20 bp for many funds which when you consider the meaningful capital that clients invest (we advise trillions) works out at a rather large free lunch for asset managers. My view is that asset managers should pay for the cost of research (both internal, their staff, and external). Both should then be reflected in the management fee for running the fund. From my discussions with fund managers most say the majority of broker research is useless for them, and the whole industry appears bloated. I accept the point that it may hinder liquidity and coverage of small caps (where retail investor presence is larger) but this is unfortunately necessary to reform a broken brokerage industry. Moreover if liquidity and coverage of small caps falls which I very well may do it should create create inefficiencies and opportunities to add alpha if you do the work.
Simon Cawkwell has some amusing comments on MiFID II. Probably the European equivalent of Sarbanes Oxley. It is probably a shift away from principle based regulation and towards rules based regulation. In the UK we have tended to be much more principle based.
I like Simon's key point. A lack of knowledge of the law is no excuse but given that MiFID II is 7,000 pages it is impossible to know the law. Something of a contradiction!!!!! Good for compliance managers, the legal profession etc etc. Will it actually help market participants???
https://masterinvestor.co.uk/evil-diaries/evil-knievil-world-needs-palm-oil-will-pay/
Did you realise that broker notes are not allowed to appear on company websites,has been the case for some time.No idea why..
Seroiusly wonder if it is worth smaller cos coming to the market at all if ,as you say Paul,potential new investors are not given enough info to make a rational investment decision.
Here we go:
http://www.cityam.com/278786/gina-miller-planning-sue-fca-over-its-lenient-approach-new?utm_source=newsletter&utm_medium=email&utm_campaign=180115_CMU_Kaplan
It has long been considered that insider sealing is a bad thing: indeed, it is illegal. So, isn't restricting the availability of information to some investors, excluding others, tantamount to creating a group of insiders and therefore a very bad thing? If FCA really want to help protect small investors they could start by cleaning up AIM and prosecuting some of the crooked directors of the frauds found there, and ensuring that house-brokers are held accountable for the so called research that some of them publish.
It doesn't seem too difficult to access research from say Edison and Equity Development. I have looked at many of these and they all put a positive gloss on the company which is being written about! You can find one today from Equity Development on the disastrous Carclo warning.. It's almost written in a fantasy style but is useful to get new lower numbers into the market so there is at least a base line.These companies are not doing cutting edge research they are being paid to put a positive gloss on everything..and very useful too.
Paul, I haven't looked closely but I think one mooted positive for some from MiFD II is that the cost of broker research for fund manager clients will be more transparent. It was previously hidden in commission costs and fund managers didn't necessarily want the research anyway. This may lead to more research competition rather than banks just blanket covering all areas. With regard to the other areas I haven't looked closely. The idea that "silly little private investors" aren't smart enough to understand research has seemed a bit suspect to me. I'm not sure what everyone else here thinks on that?
I don't understand why the research produced by the company's house broker isn't viewed as commissioned research. There's typically a payment to the house broker though I guess one can argue whether it's for advice or for research and whether there's a conflict of interest management issue. The company should be able to publish at least the house broker's note on their website and/or the broker should be able to distribute it widely for free. It is the company that "owns" the market consensus because it is the company that establishes it. Forcing brokers to monetise the company's own information is stupid.
I like commissioned research though it is really difficult to establish whether the analyst is any good. Also, different companies position commissioned research differently. Some use it as the ceiling (ie the analyst is above market consensus) and others as the floor (analyst well below consensus). It would be extremely helpful for analysts, generally, to disclose where they are relative to consensus and a brief explanation why. I've seen a few Credit Suisse notes where they highlight difference to consensus. You also then don't have to have all the notes to establish what consensus is or where it is headed.
It would also be helpful to understand whether "commissioned" research forms part of market consensus or not. Does it make it into Bloomberg or Reuters consensus? If Progressive Equity or Equity Development or Edison come out with a note that's miles below consensus, is that a profit warning by disguise? If it isn't, why bother putting forecasts in the note?
Hi gsbmba99,
"I don't understand why the research produced by the company's house broker isn't viewed as commissioned research. "
My understanding is that, post MiFID II it should still be relatively easy to get hold of house broker notes on companies, because, as you suggest, that will be treated as commissioned research.
The main problem at the moment, seems to be that there's a lot of confusion in the City, with different firms interpreting the regulations differently.
Regards, Paul.
"My understanding is that, post MiFID II it should still be relatively easy to get hold of house broker notes on companies"
Thanks for the response, Paul. That's good to hear although I suspect that "relatively easy" will depend largely on where you are in the food chain.
Hi Paul,
Just to clarify that last point, Brokers who are planning to not charge for their house research are defining it as "corporate sponsored" which means it will be widely available to "professional" investors. However, at this time I haven't heard of any that are planning on putting this out as commissioned research that is available to all investors (ie retail and professional).
The reason for this is there are extra compliance steps they need to take before publishing a report that can be read by retail investors (in the way that the likes of Edison, Hardman, ED and Progressive do). They don't want to do this...
But... I think that may change in the coming months. Listed companies pay PR fees, House Broker fees, NOMAD fees, and many pay a Commissioned Research Provider to access their retail investor base. This is a lot of fees for small companies who are looking to keep costs down... I think we will, in time, see pressure from these companies for Brokers to do the extra steps that make their research available to the whole share register.
Commissioned research providers we have on our platform have mentioned to me that they are bemused Brokers don't already do this as the extra compliance steps are not onerous (ie slightly different structure, different disclaimers, no price targets etc).
Hang on, has anyone actually read the very last paragraph?
Para 1,400,000
'Ha ha, only joking. Ignore all preceding paragraphs.'
The banks have lost the plot - i know someone who is plaster by trade has that banked with HSBC for 30 years and all of a sudden they have had their company account closed by HSBC with no reason, when they went to lloyds to open an account the bank manager there went yeah that's great for us we are getting several of these similar transfers each week.
Barclays seem to like to write to UK small limited company businesses with an American lingoed up 22 page form - fill one out once - get the exact same form 12 months later . Whats up with not even using english terminology - damn disgrace
and then M&S wont let you draw dollars if you say you are going to go to Cuba in holiday - are they puppets now for Mr Trump? do they make an MLO report if i buy their imported food from a country Mr T doesnt like - probably.
hmmm did they accidentally vote for the wrong Mr T as top banana
We have all these comedy rules/laws and then hmrc allow anyone to pay under £15 to set up a limited company direct with companies house - companies house perform no money laundering checks whatsoever on the individuals who are shareholdrs/psc's/directors or the new company.
We live in mad days - yay.
I suppose I'd better read those 1.4 million paragraphs of Mifid II before commenting. Be back in about four years, I reckon.
We are now seeing the first signs of the unhelpful unintended consequences that those in the Broking community, and we at Research Tree, have been harping on about for the last couple of years.
The bottom line is companies will always want research written on them. These companies want that research distributed as widely as possible to help raise awareness and this is critical on an ongoing basis if they are considering tapping the market for capital at some point in the future.
Brokers need to find the right model for them to ensure they satisfy all their clients, ie the Buyside and their corporate clients, as well as staying profitable. This will be a different model depending on the size of Broker.
How will the market adapt?There will be temporary disruption and we will see a reduction in research coverage on each company. For the large caps this is welcome as we don't need 35 different analysts covering a company. For the small and medium-sized companies it will be less helpful.
We are entering a choppy period as the research market establishes itself for the very first time. However as that occurs I believe we will see an expansion of providers and therefore research on our £25/month tier, with a weighting of research on house stocks but from many more providers. This will be a good thing for investors and may well result in more research being available.
Apologies for the long post on what, as Paul says, is a dry subject.
Cheers
Rob
Is it just me that thinks that the more you legislate the less the perceived problems are actually solved and the more collateral damage is done?
Phil
I have a number of bottom of draw, long term investments that I invest small monthly amounts into by direct debit. Any dividends are automatically reinvested. These have been running for best part of a decade and do very well. Now told they will no longer accept my direct debits or reinvest dividends unless I complete a documentation pack which they will send to me in the coming weeks. What sort of crook am I to dare squirrel away £200 a month over 10 years. Absolute madness!
The enhanced transparency of the bond market (requirement of reporting trades post execution) which was brought in under MiFIR to me seems a sensible part of MiFID 2 & MiFIR. This was in the hope european investors would see the benefit that investors in US bonds saw after the implementation of the TRACE system in the US, which successfully reduced costs as price discovery is easier.
The issues with research are I think unintended to some extent and hopefully through competitive forces some of this will be resolved. The intention was to reduce costs through unbundling the costs investors were already paying and pay for research and execution explicitly in order to encourage investors to execute with brokers offering the cheapest price and not because you have to in order to get your research to improve best execution. Unfortunately the terms of research licences that individuals pay for don't allow for the research to be shared which is why your broker won't be able to pass on the research. You should see a decline in execution costs though for full service brokerages. You may be able to set up an RPA account if your account is large enough which you can direct to research providers in order to pay for research.
Credit Suisse's model for research is interesting - they are making research widely available for free and then charging for contact with analysts and for bespoke models. I think this may be a strategy others will adopt.
Hi all. I’ll post a fuller comment shortly, but just want to put a brief comment here covering the Credit Suisse comment above. CS may be charging a low amount for their research (although being an ex CS analyst I doubt it’s that low) but they won’t be giving the Research away for free. That would go against one of the main functions of MiFID 2 as the research would be considered an “inducement” to trade.
Hi there - apologies I should have clarified they are distributing bond research for free
https://www.bloomberg.com/news/articles/2017-09-01/credit-suisse-is-said-to-offer-free-bond-research-under-mifid
ah gotcha, yes that makes more sense. Sorry for being a pedant!
R
Hi Paul,
Interesting (and entertaining as always) and this on top of me recently having to go through a whole lot of rigamarole and expense to provide brokers with an LEI (Legal Entitly Identifier) for my small self administered pension scheme.
I'm a total novice as far as broker research notes are concerned and I certainly don't want to spend the rest of my days ploughing through the MiFID II regulations so this is undoubtedly a stupid question. If, perviously, brokers were happy for their research to be circulated to all and sundry at no cost but now they can only provide it to paying "customers" why do they not simply make a charge of £1 per report. I'm sure anyone interested in receiving receiving notes would be prepared to pay.
Another brief response here. There was talk midway through last year of doing just that. Some of the big investment banks were rumoured to be considering selling their research for a minimal fee like £1... BUT this was shut down pretty quickly as regulators made clear that a token payment would not be in he spirit of the regulation and hence the research would still be considered an inducement.
A great read, and really appreciate this. There is a lot of information to take in so I am re-reading it.
One query: Paragraph 3 states:
'However, my main broker just said that the new rules would restrict my access to research notes, so the easiest thing would be if I requested to be registered as a professional client. This means giving up some protections, but I went ahead with it anyway.'
than paragraph 14 says
'I was looking at a company that a friend recommended to me, so I emailed my broker as usual, to request broker research on it. The response, for the first time ever, was, "Sorry Paul, we've got some research on it, but unfortunately compliance won't let me send it to you, because of MiFID II"'
This confused me a bit as I expected your professional status was intended to get around this problem?
Registering as a professional client got round only some of the problems in my accessing research, unfortunately. Some research providers have barred my broker from forwarding on their notes to clients, including professionals, whereas others haven't.
I think the waters are a bit muddied at the moment, with brokers & their compliance people still working out how to interpret the MiFID II rules.
So things might alter in future.
Regards, Paul.