Theresa May’s mantra of “Brexit means Brexit” is starting to take on some meaning after all.
She told the Conservative Party conference that Article 50 will be triggered by March next year and her Government will annul the 1972 European Communities Act replacing it with the Great Repeal Bill: the law to end all EU laws – or at least let us pick and choose those that we want.
Whether we like our Brexit hard or soft no-one can escape the fact that EU laws will still apply in the UK during the two-year negotiation we face from March onwards. As a result two new sets of EU directives will have a major impact on the Financial Services sector. The first is MiFID II (the second Markets in Financial Instruments Directive) which comes into force in January 2018, the second is the Market Abuse Regulation (MAR) which came into effect less than two weeks after the Brexit vote.
MiFID II covers a wide range of protections, regulations and reinforcement of supervisory powers, but the heavy emphasis on investor protection is particularly interesting, especially the aim to avoid conflicts of interest, provide greater transparency, and to ban commission payments for investment advice – all, it is hoped, in favour of the private investor.
MAR tackles market abuse offences: insider dealing, unlawful disclosure of inside information and market manipulation. There’s nothing wildly new here, but there are new obligations for companies and advisers to keep detailed lists of when information is disclosed and to whom, with much greater scrutiny promised over instances when inside information is not disclosed immediately.
In practice this all seems perfectly laudable and should be hailed by private investors as another small step towards levelling the playing field between the smaller investor and the “old boys” network of City institutions. But in reality, retail investors could be worse off in the information game as the full impact of the regulations begin to hit home.
The first is that MIFID II will dramatically change the way equity research is produced, distributed and readily available. “Soft” commissions from institutions in return for “free” equity research will be banned, and so the question is: who will pay for equity research?
Will the PLC have to pay? They do so already as part of their advisory fees but there is no transparency as to how this fee is broken down, and with reduced commissions, the cost of research will only go up.
Will Fund Managers pay? Some institutions have said they’ll carry the cost of research as a central overhead but this will lead to these firms using a smaller group of trusted analysts and so we’re likely to see an acceleration of the already active Small Cap and AIM broker consolidation. Some institutions have even suggested building up their own internal analyst capacity to do away with the need for external research. All in all, we’re likely to see less research available in the market, that research will become an expensive and valuable commodity, and private investors will be priced out of the equation when it comes to paying for it themselves.
Sadly for smaller companies the burden is likely to fall on the PLCs themselves, adding to the accepted cost of maintaining a public listing and I fear that MAR will be used as an excuse by many to withdraw from direct engagement with private investors.
Only the next two and a half years will show the real impact of MIFID II and MAR, and by then we’ll need to quick decide what we do pick and choose come the Great Repeal Bill.
Not many City advisers can claim to have been a Vatican DJ and the first and (probably) last person to play Jimi Hendrix on Vatican Radio.
Mr McManus began his career as an English voice broadcaster for Vatican Radio in Rome before joining City PR firm Binns & Co.
In 2009 he founded Walbrook PR, which provides financial PR and investor relations advice to smaller growing companies. Walbrook advises over 65 small cap and AIM listed companies valued from £5m up to £250m including Yorkshire based companies like Animalcare, Getech, Filtronic, Mobile Tornado, OptiBiotix and Renew Holdings.