Problems caused by MiFID II

Saturday, Jan 13 2018 by


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,…

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37 Comments on this Article show/hide all

tic_tac_toe 13th Jan 1 of 37

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?

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Paul Scott 13th Jan 2 of 37

In reply to post #297533

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.

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Laughton 13th Jan 3 of 37

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.

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ls2g08 13th Jan 4 of 37

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.

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RMundy 13th Jan 5 of 37

In reply to post #297558

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.

Website: Research Tree
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RMundy 13th Jan 6 of 37

In reply to post #297553

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.

Website: Research Tree
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Maca2000 13th Jan 7 of 37

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!

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ls2g08 13th Jan 8 of 37

In reply to post #297578

Hi there - apologies I should have clarified they are distributing bond research for free

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Edward John Canham 13th Jan 9 of 37

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?


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RMundy 13th Jan 10 of 37
Thanks Paul, as always very insightful.

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 undoubtedly be an increase in the number of commissioned research providers (eg Edison, ED, Hardman etc).
  • There will be a blurring of the business model lines for the smaller/niche brokers who will take on some similar characteristics as commissioned houses. They may define much of their research as "corporate-sponsored" (or another dry jargonistic word), and not charge for it, thus making sure they provide as wide a distribution for their clients as possible.
  • In my opinion, medium-sized and larger brokers may also either start to classify the research they write on their clients as "corporate-sponsored" and charge zero to ensure wide distribution OR charge low rates for the same reason. They will then charge higher levels for their full research coverage and full service (eg meetings, calls, models etc) which makes sense because it is where they deliver most of their value to the Buyside and it is what their main fund manager clients have been paying for for years now.
  • Larger providers will trim their research output. Some may focus more on specialist sectors rather than "waterfront" coverage. Fund managers will become far more demanding as most are taking the research costs onto their own balance sheets. We may well see an increase in ballsy calls and less herding. Hence there are definitely positives to the regulation at the larger end.

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.



Website: Research Tree
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RMundy 13th Jan 11 of 37

In reply to post #297598

ah gotcha, yes that makes more sense. Sorry for being a pedant!

Website: Research Tree
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shine66 13th Jan 12 of 37

I suppose I'd better read those 1.4 million paragraphs of Mifid II before commenting. Be back in about four years, I reckon.

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rmillaree 14th Jan 13 of 37

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.

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shine66 14th Jan 14 of 37

Hang on, has anyone actually read the very last paragraph?

Para 1,400,000
'Ha ha, only joking. Ignore all preceding paragraphs.'

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gsbmba99 15th Jan 15 of 37

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?

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Paul Scott 15th Jan 16 of 37

In reply to post #298088

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.

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gsbmba99 15th Jan 17 of 37

In reply to post #298103

"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.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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