Mifid II: Clearing up the questions
In February we wrote about the risk of fog in the Channel undermining Mifid II, and work by the European Securities and Markets Authority (Esma) to find a harmonized solution.
The mist has now cleared: on Tuesday, April 4, Esma published a comprehensive Q&A statement detailing exactly how it interprets the requirements. In relation to corporate access, it has taken a much harder stance than many expected, in line with the UK Financial Conduct Authority’s (FCA) position, using language that is clear and succinct. There are five main points:
– Corporate access is not research and should be considered a discrete service. It needs to be paid for from P&L and it’s ineligible for payment from research payment accounts
– Sell-side firms will need to price their corporate access offering at a true stand-alone price point. ‘It is important that the provider prices services at commercial levels and access itself is not linked to or dependent on payments for research or execution services where the provider offers these other Mifid services,’ the Q&A states
– Corporate access is not a minor non-monetary benefit, except in very limited circumstances. ‘Esma considers that where a corporate’s investor relations office (or its ‘house broker’ if the service is paid for by the issuer) organizes investor ‘roadshows’ to support a capital-raising event and it is freely and publicly open to analysts from investment firms and other investors, it could be capable of qualifying as [an] acceptable minor non-monetary benefit…’
– Responsibility for deciding whether or not to accept a benefit as minor sits with the receiving firm. Esma expects firms to ‘carefully assess’ this, and reiterates Recital 30 of the Delegated Acts as the core test: ‘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.’
Further guidance states: ‘…corporate access services offered by a third party that are by their nature exclusive, such as individual meetings or field trips with a corporate, may involve the allocation of valuable resources by the provider and/or have a value to the recipient such that the benefit is not minor in nature and scale and could influence [the recipient’s] behavior.’
– A clear statement of what best practice looks like. ‘There also remains the option for an investment firm wishing to meet with a corporate issuer individually to approach [it] directly and/or pay for a third party corporate access service provider [that does not provide other Mifid investment services] to facilitate meetings,’ the Q&A notes. ‘This removes the primary potential conflict of interest or inducement risk that could arise if meetings are provided by another Mifid firm with whom they have other commercial relationships.’
All this will require radical change to current market practice. Sell-side intermediated corporate access will need to become explicitly and properly priced – the practice of paying a nominal price per meeting doesn’t cut the mustard. Sophisticated buy-side firms will not sign off corporate access as a minor non-monetary benefit in the knowledge of the Recital 30 test and Esma’s guidance – especially not in the UK where the FCA has stated it intends to hold individuals and boards accountable. Investor one-on-ones explicitly cannot count as minor, and group meetings could count on deal roadshows only where they are freely and publicly open to all and where the third party firm is paid for by the issuer.
This means buy-side firms will need to start paying significant hard dollar sums from P&L for any meetings they accept or attend that have been organized by a Mifid firm such as an investment bank. This in turn will lead to many buy-side firms internalizing the corporate access process and engaging with corporates directly, something that poses significant scale challenges if done manually.
Separately, the FCA has announced it will release its final Mifid II rules and requirements in June.
Michael Hufton is founder and managing director of ingage IR