Brexit won’t save UK’s equity analysts

When the European Union’s MiFID II financial rule-book was rolled out in 2018, asset management veteran Martin Gilbert warned of the unintended consequences for the bankers and brokers supplying trading services and investment research to his industry.
With fund managers suddenly forced to budget and pay for investment research ideas separately from their actual trades, it seemed inevitable that overall costs would rise and spending on research would fall. The unknown was size of hit on investment bank revenue, with research and advisory work in European equities worth about $1.4 billion a year previously. Plus there was danger of small company stocks becoming uneconomic for some firms to cover.
Two years on, the damage is clearer. Big asset managers have cut their research budgets by an estimated 20%-30%. That has led to a price war among providers that only the biggest can win, with bulge-bracket banks charging about $10,000 a year for coverage of a company, whereas independent analysts hope for about $2,000 per PDF.
And there are fewer analysts overall. EMEA headcount for equity research at 12 major investment banks fell 14% between 2013 and mid-2018, according to research firm Coalition. There are fewer independent research firms and, as expected, there’s less coverage of small stocks.
City of London Brexiters might see this as evidence of the kind of business-killing EU red tape that Britain could ditch happily. The UK’s Financial Conduct Authority (FCA) has been pitching its post-Brexit regulatory regime as one based more on principles than “detailed rules”; one that adapts to real-world, “practical” experience.
But it turns out British regulators rather like rules, too, sometimes even more than their continental peers. The FCA was the loudest supporter of the research curbs when MiFID II was being drafted. As a preeminent European financial regulator, it had influence and a compelling argument for unbundling spending on research from spending on trading: The cozy, clubby old ways of the City had resulted in wasteful spending and a deluge of analysis on companies that was of questionable value and dubious independence.
This is why, even as Brexiters like UK Prime Minister Boris Johnson bash regulations for everything from kippers to socks, the FCA still thinks everything’s peachy with the new rules on investment research.
It’s in France and Germany that a MiFID push-back is gathering steam. France’s AMF markets regulator is studying ways to limit the impact on small-cap stocks, and has called for “no-action” waivers for potential rule breaches. Germany’s list of objections seems to have convinced the EU to think about “tweaks,” according to the Financial Times.
There appears to be a negative impact from the rules on fund performance too. Political uncertainty has made UK stocks less attractive, and pressure to sign a post-Brexit trade deal will probably keep financial rules aligned with the bloc for years. Even in London, the regulators will stay in charge.
—Bloomberg