FCA proposes rollback on MiFID II small cap research

The Financial Conduct Authority (FCA) plans to roll back some of the MiFID II requirements covering investment research and reporting requirements for share trading to ensure that asset managers do not lose their edge in the wake of Brexit.

The UK watchdog has proposed that research on small- and medium-sized companies with a market cap of less than £200m — as well as income, currencies and commodities — will no longer be subject to the “inducement” rules.

Research from independent providers will also be exempted from the inducement rules.

In its supervisory work, the FCA showed that research spending by asset managers dropped by between 20 % and 30% following the introduction of MiFID II.

Although its analysis did not find the unbundling requirements significantly affecting coverage of smaller UK public companies, levels were already low, with an average of 1.6 analysts per company with a market cap of less than £1 bn.

In addition, the FCA said that 79% of publicly traded companies with a market value of £250m or less have either no research coverage or are followed by only one analyst.

The lack of information leads to less efficient pricing in their securities compared to larger listed rivals, according to the FCA.

The regulator has also proposed that asset managers should be allowed to pool together money to fund research on smaller companies.

There has also been concern that innovative new businesses under MiFID II would find it more difficult to raise money to fund growth from institutional investors.

The FCA said, “Our proposals aim to reduce burdens on investment firms while having regard to growth and the competitiveness of UK financial services.”

The FCA was one of the main architects of Europe’s MiFID rule book and has been a long-time proponent of unbundling execution from research. However, after the UK left the European Union, it has pledged the country will not be a “rule taker” from Brussels which is already leading to divergsing regulatory paths.

“Just four months in from Brexit and already rules are beginning to change for research houses and providers,” said  Daniel Carpenter, Head of Regulation at regtech firm Meritsoft a Cognizant company). These proposed changes illustrate the inevitable complexities that arise whenever there is a growing divergence of rules across different jurisdictions.”

He added, “Firms will need to find a way to manage multiple EU research agreements, in addition to UK specific ones relating to small-cap stocks. It all amounts to one thing – a mountain of additional complexity when it comes to structuring and invoicing research fees and contracts.”

 

©Markets Media Europe 2021

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