A Waterloo moment for Mifid II
Why is July 3 significant? It’s the deadline by which all EU member states must have Mifid II adopted into local rulebooks – and it’s a date that’s fast approaching.
With what’s known as the ‘transposition deadline’ less than five months away, you’d think regional regulators would be on the same page. Uncertainty has arisen, however, in the dramatically different positions taken on corporate access by the two regulators who’ve published their Mifid II consultation papers thus far: the Financial Conduct Authority (FCA) in the UK and the Autorité des marchés financiers (AMF) in France.
Under the FCA’s interpretation, corporate access can only be treated as what the European Commission terms a ‘minor non-monetary benefit’ (MNMB) in very limited circumstances. This matters because in all other circumstances, corporate access must be treated as an inducement, separately paid for and priced on a true, stand-alone basis.
In addition, corporate access explicitly is not research and cannot be paid for from research payment accounts. Contrasting this, the AMF suggests drawing a distinction between ‘concierge service’ corporate access as a MNMB – which could be provided by firms free of charge – and ‘intellectual service’ – which the French regulator proposes could be charged to clients as research.
Substantially different interpretations of the rules across EU member states will fatally undermine Mifid II. Clarity and uniformity are paramount if it is to succeed and the European Securities and Markets Authority (ESMA) is working to promote a harmonized approach. ‘Equivalence’ and ‘regulatory convergence’ are the current buzz words, especially post-Brexit.
In trying to analyze the issue of whether or not corporate access should be considered an inducement, it is important to go back to the source text, the Delegated Acts for Mifid II, published by the European Commission in 2016, which state: ‘In particular, any non-monetary benefit that involves a third party allocating valuable resources to the investment firm shall not be considered as minor and shall be judged to impair compliance with the investment firm’s duty to act in its client’s best interest.’
Despite the AMF’s seemingly differing view of corporate access, the regulator’s February 9 feedback statement specifically acknowledges this clause (clause 30), implying some softening of its position.
Critically, though, the judgment of whether a benefit received is minor or not lies with the receiving firm. So the real question is whether CIOs, COOs and heads of compliance at large asset management firms will be comfortable signing off corporate access as an MNMB, in the knowledge of this test stipulated both in the EC Delegated Acts and replicated verbatim by the FCA in its Conduct of Business Sourcebook.
The COO of one large UK fund house we met with recently summed this up rather well. If he took the service away from his portfolio managers and analysts, he said, ‘Would they squeal?’ If they would, clearly it’s not minor.
Whatever their decision, firms will need specialist record-keeping and reporting systems to record, and evidence, all their corporate access activity, how it was arranged, treated and paid for.
One potential solution to finding a harmonized approach for regulators might lie in replicating elements of the proposed new rules for research. Research can be received by an investment firm as an MNMB where the third party firm is engaged and paid by the issuer. This would be a logical approach for corporate access, too.
If the third party firm is both retained and paid by the issuer, the payment trail is clear and there is no inducement. Likewise, if the institution can demonstrate paying a true stand-alone price, again, there is no inducement.
For IROs at quoted companies this entails two principal risks: asset managers could make different judgments as to whether they treat corporate access as minor or not, making roadshow execution more difficult; and corporates could be increasingly asked to shoulder more of the cost.
The most likely outcome is continued growth in the trend of institutions and corporates internalizing a greater portion of their corporate access activity – and this will require IROs to secure greater resources and higher budgets.
In a bundled world, corporate access is not free – it’s just that you don’t know where you’re being charged or how much you’re paying. Ensuring transparency of corporate access payment flow is a critical component in enabling the unbundling at the core of Mifid II. Separating this out will allow competition and innovation to flourish and should ultimately mean better quality, lower prices and better outcomes for investors, corporates and third party firms.
This is what Mifid II is all about: Clause 1.1 of the Delegated Acts reads: ‘Finally, the overarching aim of the Mifid II/Mifir regulatory package is to level the playing field in financial markets and to enable them to work for the benefit of the economy, supporting jobs and growth.’