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Sep 11, 2016

Regulatory update: Focus on Europe

Major regulatory changes have become the norm for Europe’s IR professionals

This article was produced in association with ELITE Connect. It was originally published on the ELITE Connect platform.

The last year has seen new rules come into effect across the continent covering areas from corporate reporting to accounting and market abuse. Then of course there is Mifid II; crucially for IROs, the far-reaching legislation is predicted to cause a major shake-up in the equity research industry. The UK’s vote to leave the European Union (EU), meanwhile, has created further uncertainty. Below, we round up the latest Europe-wide regulatory changes affecting the IR profession.

Markets in Financial Instruments Directive 

The second installment of the Markets in Financial Instruments Directive (Mifid II) has suffered from delays – the implementation date was postponed by 12 months to January 2018 – but it is already having a major impact as market participants gear up for the changes.

Of most interest to IROs is the potential impact on research. Under the new rules, investment firms will have to pay for research out of their own costs or through a payment account pre-agreed with clients. Either way, downward pressure is expected on research payments, which could lead to a scaling back of coverage – something large caps might welcome but small caps will fear.

Kay Bommer, general manager of German IR body Dirk, recommends that IROs see the changes as an opportunity rather than a threat. ‘I believe the legislation fits in well with the general development of the IR function, as it will make an IRO’s job more strategic,’ he comments. ‘IROs will have a more proactive role in targeting and roadshow effectiveness, which also gives them the chance to request greater resources – provided the C-suite is receptive.’

Alternative performance measures 

In July 2016 the European Securities and Markets Authority (Esma) brought in new guidelines on alternative performance measures (APMs), which are financial indicators provided in addition to traditional IFRS earnings figures.

The aim of the new guidelines is to promote the ‘transparency and usefulness’ of APMs, according to Esma, amid worries they could be used to disguise true financial performance. APMs need to be disclosed and reported properly, so ‘people can reconcile them and see whether they want to make any adjustments,’ explained a corporate reporting expert at the IR Magazine Think Tank – Euro Leaders 2016 in June.

New market abuse rules

Also in July 2016, the EU introduced new requirements under its Market Abuse Regulation, covering areas such as disclosure of insider information, insider lists and senior managers’ dealings. For larger companies the changes are an evolution of existing rules; law firm Linklaters cautioned issuers over ‘subtle differences and important new procedural requirements’.

For smaller companies, however, the changes may be more substantial, with rules now applying to multilateral trading facilities such as the UK’s Alternative Investment Market. Here, keeping insider lists is a new obligation – which may have been taken a step too far, Bommer believes. ‘The regulation is creating more directors’ dealing notices and more administrative tasks that are not necessarily serving their purpose, although the burden will fall more on the compliance and legal departments than on IR,’ he says.

End of mandatory quarterly reporting

Last November Europe ended the requirement for listed companies to report financial information four times a year. The specific impact of this change depends on which country you operate in, however. In some markets, like Germany and Austria, larger companies will need to continue quarterly reporting (although a drastically shortened version is now allowed) because it is still a requirement of the prime segment of the main stock exchange.

A Dirk study reveals that the measure – a huge step forward, according to Bommer – was generally very well received. ‘This might push smaller companies that were already producing the regulatory lightened version to consider an upgrade to the prime section,’ he notes.

In France and the UK, by contrast, the exchanges have no such rule and some companies, such as National Grid and Diageo, have stopped first and third-quarter updates entirely. (The UK government brought in the rule change a year early, so British companies have had a head start on the rest of the continent.) Those considering a change should take into account their business and industry dynamics, and also sound out the investment community, said Aarti Singhal, director of IR at National Grid, speaking to IR Magazine earlier this year.

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