It’s been nearly two years since the Markets in Financial Instruments Directive (MiFID II) has been introduced and its impact is beginning to be analysed.

The MiFID II laws were introduced by EU with the intention of improving protections for investors and creating uniform standards across Europe.

While retail investors in Australia may not see much relevance in the European laws, Aussie institutions with any dealings in Europe have had to fall in line.

The impact would inevitably be felt by the ASX small caps that are dual-listed in London.

There are numerous aspects to these laws — much of which financial institutions would call ‘red tape’ (to themselves of course). But one of the most controversial was the unbundling of equity research, meaning it had to be specifically paid for rather than being a complimentary inclusion in brokers’ services. Arguably, this was one of the reasons why equity research was the biggest victim of Deutsche Bank’s job cuts.

Last year, ASIC commissioner Cathie Armour said in an address to the annual conference of the CIMA Society of Australia that ASIC was watching these laws closely. It is one thing to say asset managers have to act in the best interests of clients, but actions speak louder than words, she argued.

Then in February this year her colleague John Price reiterated ASIC’s eyes were on it. He said ASIC had engaged the UNSW Business School to survey fund managers that might be affected by MiFID II.

Last week, European based financial communications consultancy Citigate Dewe Rogerson released a survey that found the equity research industry has been impacted by these laws.

Just over half — or 52 per cent — of UK-listed companies saw a year on year drop in analysts covering them and two fifths found a fall in the quality of research. While the impact wasn’t as bad in Europe, those figures were still high, at 39 per cent and one fifth respectively.

The head of investor relations at Citigate, Sandra Novakov said lower coverage means institutional investors will not notice and the stock will become illiquid — thus undermining the reason for remaining listed.

On the positive side, she observed investor relations professionals were taking note. “The good news is that IR professionals increasingly see this danger and are taking proactive steps to address it, such as actively articulating their investment case and increasing roadshow frequency and effectiveness,” she said.

But it’s here to stay  

The UK’s Financial Conduct Authority released its own review last month and it found itself that research was cut back. Budgets had fallen on average by 20-30 per cent.

But according to its own research, most asset managers were still getting the research it needed.

“This implies that most savings reflect greater competition and market efficiencies, including firms better assessing how much and what type of research they need,” it said.

“We encourage firms to maintain the improved scrutiny we have seen when setting their research budgets and negotiating competitive prices with providers.”

While a further investigation will be done in 12-24 months’ time, hopes that any change will be forthcoming will be low. The FCA said the changes were “broadly positive”. 

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