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Dec 03, 2019

The 2010s in review: Change in the rules of engagement

During the last decade, corporate access moved from running quietly in the background to being front and center of regulators’ concerns

This is the first in a series of columns to be published over the rest of the year, looking back at changes to IR during the 2010s.

‘If a fund manager is willing to fly halfway round the world to meet with a company, he/she must be deriving value from that meeting. How is this not unequal dissemination of information?’

This was the open question being posed by some regulators when the topic of meetings between quoted companies and investors first came to regulatory attention a decade ago. The talk at the time was of banning this activity – or requiring meetings to be streamed on the internet.  

I was horrified. As a bottom-up stock-picker, meeting with companies and doing deep work to understand their strategy was core to my investment process. Furthermore, before the financial crisis, a key systemic failure was the widespread lack of institutional investors taking a stand and holding management to account. We needed more investor engagement, not less. This is what sparked my interest. I went to see the regulators and have devoted myself to the topic ever since.  

Almost a decade later, things have gone full circle. Engagement is now not just desirable, the new 2020 UK Stewardship Code mandates it, and across asset classes. 

The way investors and corporates engage has changed, too. The biggest shift is in awareness. A decade ago, few questioned how corporate access was arranged or paid for – the process ran smoothly in the background, as it had for decades, and this was just how things were done. Regulation shone a spotlight on the costs and conflicts inherent in those practices. Intermediaries such as brokers remain a critical part of market infrastructure in the new regime, but more engagement is now done direct and few would now outsource the entire process without oversight, as would have been the norm just a few years ago.   

Today the industry remains in transition. As with the introduction of any new system, reality on the ground reveals complex scenarios, edge cases and bugs that require refinement, fixing and retesting. The Mifid II regime is not quite there yet. Easy tweaks could be made to improve how it all works. 

Looking across jurisdictions, the jury remains out on how far, and how fast, unbundling will come to the US. The SEC’s extension of no-action relief gives another three years to see how events pan out – but pressure from US asset owners to access the lower costs available to European investors seems likely to grow. The European Commission is consulting on parts of the Mifid II regime, with a focus on the impact for smaller companies in particular, where both France and Germany have voiced concern. 

In practice, rolling back to a bundled model for smaller companies seems far-fetched: reintroducing higher costs and opacity is hardly the most obvious way to attract capital to what has always been the more illiquid end of the market. Perhaps adoption of the retained-and-paid UK corporate broking model for smaller companies in other markets would be a solution, bringing guaranteed research coverage, corporate access and market-making? Exchange groups and other third parties have roles to play, too.

From a big-picture perspective, while regulation has proved a catalyst, the principal agents of change are underlying tectonic shifts in the industry. In asset management, over the past two decades index hugging has gone from de rigueur to illegal. Low-cost index funds are, increasingly, the dominant force to be reckoned with. Crisis and scandal mean trust, confidence and understanding are low. Transparent, fair pricing is a critical ingredient of success. Moving back to practices that principally benefit the operators of the system over its customers is doomed to fail: it is simply not an option.   

Regardless of the Brexit outcome, the UK can and will maintain its place as one of the world’s largest, most liquid and most vibrant capital markets. It will achieve this by offering a clear, fair, transparent and competitive regime to investors, corporates and service provides alike; a framework in which lessons are learned when things go wrong, rules adjusted as appropriate – and then enforced. It will put us in a leading position for the next decade. Capital will come flocking.  

Michael Hufton is founder and managing director of ingage IR