Mifid II has finally landed. We now move from hypothetical analysis by pundits to observation of hard facts on the ground. Only time will tell whether this proves to be another Big Bang or Millennium Bug 2.0, but in some areas the road ahead is already clear.
Hard evidence of the concept regulators call ‘internationalization’ came at the Australasian IR Association’s annual conference in Sydney in November, with the head of stewardship for Asia-Pacific at BlackRock confirming the world’s largest asset manager would roll out Mifid II across the firm globally.
There could be no better illustration of the extra-territorial nature of this legislation and the trend toward adoption of a common standard. It is simply too complicated to run a global business to multiple sets of rules, so large firms are likely to operate to the gold standard across their businesses. Commercial realities add to this pressure.
IR Magazine has previously written on the SEC’s first forays into this arena. Large asset owners will drive the shift to transparency and unbundling in the US, exactly as we see happening in other parts of the world. The genie isn’t just out of the bottle – it’s starting to find its mojo.
Plus ça change
Contrasting with this, many IROs report tales from the sell side that it’s business as usual: nothing will change. A common view is ‘the banks will find a way’. This may prove complacent. That we have come to expect circumvention of the rules is a problem new measures such as the UK’s Senior Managers and Certification Regime is specifically designed to address.
Enforcement action will prove an important component in setting the boundaries – for example, the FCA’s recent confirmation that it sees a lower-bound price point at which it considers research received to be an inducement, and that responsibility for making this assessment lies with the buy side.
Exactly the same logic applies to corporate access, which under Mifid II must be explicitly and separately priced at true, stand-alone ‘commercial levels’. The regulator has made its expectations clear, saying we should expect to see enforcement ‘where firms have made no real or genuine attempt to be ready or where key obligations are deliberately flouted.’
The simple fact is that it’s impossible for established practices in many areas, such as research and corporate access, to remain as they were pre-Mifid II unless the new rules are a) ignored and b) unenforced. Both scenarios seem unlikely, and high risk.
My sense is that people increasingly realize there is an element of the Emperor’s New Clothes to these protestations of ‘no change’. Everywhere corporates report burgeoning direct requests from investors. Several large asset managers have signaled intentions to grow significantly the number of engagement meetings they have with portfolio companies, and to arrange these meetings directly, not via brokers.
Asset owners, too, are increasingly familiar with these issues and question why they, or the fund managers they engage, pay large sums to intermediaries for research, or to source meetings they could easily arrange directly, at significantly lower cost and without conflict.
We don’t yet know exactly how things will play out in 2018, but the direction of travel is clear – we’re not driving off the edge of a cliff. We will, however, be navigating a different road, and I would expect change to gather pace as people experience the odd pothole first-hand. That change will be driven by the buy side, not the sell side, and when corporate IROs see hard evidence of this shift in institutional behavior they will rapidly follow suit.
I remain firmly of the view that the long-term consequences of Mifid II will be great for IR and for end-investors. Processes that have been outsourced to intermediaries for decades will be taken back in-house. This will require more work, and more budget, but at a system level it will cut costs, increase efficiency and eliminate conflict.
The result will be better information flowing between investors and corporates directly, and less noise. The skewed incentive of generating short-term trading volume to pay for it all will be eliminated. Less ‘free’ information in circulation means physical meetings between corporates and their investors will become even more important.
Decades-old practices, which were familiar and convenient but not always effective, will need rethinking. Technology has a key role to play, introducing new tools and helping all market participants adapt efficiently to the new environment. I’m excited about the future.