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Dec 11, 2018

Mifid II experts challenge AMF chairman’s assertions on regulation

No merit in AMF unbundling critique, say commentators

Comments made by Robert Ophèle, chairman of French market securities regulator the Autorité des marchés financiers (AMF), on Mifid II have been given short shrift by Mifid II experts. 

Ophèle recently warned: ‘Even without Brexit we would have had to look at [Mifid II] again because there are very detrimental effects on research, especially for mid-caps, that’s absolutely clear.’

He said Europe was engaged in a ‘dangerous game’ as research capacity was being pared back for many smaller companies – especially after the rise of passive investment strategies that track market indices. ‘It’s clear that from the beginning we at the AMF thought it was not a very good idea to develop this complete unbundling,’ said Ophèle.

But leading Mifid II expert Michael Hufton, managing director of ingage, is critical of the AMF’s stance. ‘From my perspective, it is extremely hard to see any merit in the AMF’s case,’ he says. ‘The evidence so far is that Mifid II has led to increased transparency and competition and substantially reduced the cost of investment.   

‘Mifid II unbundling now enjoys broad support: from the industry, from end-investors and from regulators – people now understand the inherent conflicts in the old model and see that it’s no longer fit for purpose.’

This view seems to be supported by both the Australian Securities and Investments Commission and the UK’s Financial Conduct Authority, which have both stated they see evidence of a flourishing independent research community as a result of Mifid II. 

Hufton adds: ‘[AMF’s position] is folly – and I suspect is likely to backfire. Ensuring a fair, transparent, level playing field that works well for all is the way to create trust in financial markets and ensure they thrive. This is exactly what Mifid II does, and it’s why the Mifid II model is globalizing – and far quicker than anyone thought would be the case.’

Marina Zakharova de Calero, IR director at communication consultancy Powerscourt, also expresses surprise: ‘I would expect AMF to support initiatives and legislation that lead to greater transparency for investors – which is what Mifid II is set out to achieve. We’ve seen issues with coverage of small companies for many years, way before Mifid II. 

‘The profound nature of this regulation demands a shift in mentality by the investment community, which has to be more mindful of its costs. I always saw that smaller investment houses would be affected to a greater extent, as they are more sensitive to absorbing the Mifid II-related costs on their profit and loss statement. 

‘But it does mean that all players – not just the sell side – have to adjust and adopt the offering to achieve more transparency and ultimately more value for money for the end-investor.’

Fraser Thorne, chief executive of London-based Edison Investment Research, is also skeptical of the AMF and France having a different approach. ‘While France may wish to row its own regulatory boat, it goes against the grain to try to attract international investors to operate out of France by having a less transparent and less competitive model than your neighbors,’ he points out. ‘On top of this, how will they regulate all of those French institutions that are keeping their broking headquarters in London?’

With Mifid II being global in scope, Thorne cannot see how this can be untangled. ‘The institutional investor is leading the drive to adopt Mifid II and this means it has a far wider global impact than just France and the rest of Europe,’ he explains. ‘It is being implemented as best practice across the industry and it is hard to see how this can be unpicked.’ 

Without overtly agreeing or disagreeing with the AMF, Emilie Megel, director at French IR association Cliff, indicates that Mifid II has created a complex European landscape. ‘For several issuers, the access to investors is becoming far more complex as a result of numerous drivers including a lower quality of the investor targeting from some brokers, increasing demand for direct contact, bypassing brokers and lower attendance at several conferences,’ she says. ‘This may result in increasing the overall costs of the listing.’

Research from Cliff shows that in terms of sell-side research, coverage is highly correlated to market capitalization. The average coverage amounts to 12 analysts by issuer up until May 2018, but this is hiding a very contrasting situation. While large caps are covered by an average of 26 sell-side analysts, this number falls to five for all market caps between €500 mn and €1 bn ($569 mn to $1.14 bn), to three for market caps between €100 mn and €500 mn and only two below a market cap of €100 mn. 

Thirty-nine percent of issuers with a market cap below €1 bn already have a contract of sponsored research to secure a minimum level of coverage. The average coverage for all market caps below €1 bn decreased from five analysts to three between October 2017 and May 2018, during the implementation of Mifid II regulation.

Assessing this, Thorne comments: ‘Small to medium-cap equity research coverage in France, like in most of Europe, has been in decline for a number of years for reasons outside of Mifid II. But Mifid II does expose inefficiencies across the sell side and brings transparency to the cost of producing equity research.

‘The pressures of Mifid II have forced some UK-based brokers to reallocate resources to smaller mid-cap names where they feel they can better differentiate themselves and help identify alpha, and we could see this trend roll out across other geographies in the coming months.’

Focusing on the impact of Mifid II, Gary Davies, CEO of the UK’s IR Society, says: ‘Although change is never without challenges, the opportunity being created by Mifid ll is putting control back in companies’ hands, allowing them to take more ownership of their IR programs and investor targeting efforts. 

‘That brings with it a need for proper resources, which is where the current areas of contention are focused. From a company perspective the immediate effects have included more direct contact from the buy side to corporates, a decline in attendance at investor conferences and gaps in broker-led roadshows. 

‘Areas of focus for UK corporates are the quality of investor feedback, quality and quantity of research coverage, liquidity, valuation and consensus guidance. There are, however, big differences between large and small-cap companies. Larger caps are addressing internal resourcing as a result of more buy-side direct contact. At the other end, mid to small-caps are more concerned with the prospect of declining sell-side coverage, reduced investor access, and more internal costs and resources.’

Hufton believes people should not lose sight of the central, and important, principle behind the European legislation: ‘Mifid II unbundling rules don’t in any way stop investment banks or anyone else producing research. The critical change Mifid II introduces for research is transparency, of both pricing and payment.   

‘If investors want research, or if companies want research, no problem, they can have it: Mifid II enables a fair, transparent market for that research, where banks, independents or any others can produce research, and investors or corporates can pay for it. 

‘The single thing Mifid II prohibits with regard to research is the costs of that research being debited from investors’ funds without their knowledge. And this has to be a good thing.’