Lakeside View 1 / 2018

MiFID II is aimed at improving investor protection and transparency. However, MiFID II also stands for an increasingly impeded access to investors and research particularly for small and medium-sized issuers. This calls for new approaches and solutions.

Munich, January 3, 2017: Today’s entry into force of MiFID II constitutes a further step towards transparency and investor protection. This also affects listed companies, as MiFID II will regulate the interaction between issuers, investors and brokers going forward – predominantly in relation to the remuneration of services for research and corporate access.

Until now, banks have provided their analyses, updates and market views to their customers – asset managers and funds – without charging them directly. The good services of banks and brokers were covered with the proceeds from dealing commissions – higher commissions were justified with particularly good services. Bringing together companies and investors in the context of roadshows and field trips took up a major part of a bank’s services for their customers in the brokerage business. Particularly small enterprises have benefited from this system as the provision of research and the organisation of meetings by brokers was possible, even if the company in question did not directly generate commercially relevant trading volumes, as long as investors gained an advantage in terms of services.
This approach will radically change resulting from the entry into force of MiFID II – investors will now have to pay for research and corporate access services, dealing commissions may only be related to the execution of a trade but not to additional undefined services.
Deutsche Börse quite rightly expects that this will have a great impact on listed companies – major changes are predicted particularly for the small and medium-sized enterprises [1].

The smaller the less…

Going forward, investors will have to intensively address the question of how they want to spend their budget for services related to research and company meetings. These services will have to be paid from own resources or from a so-called analysis account, which is fed by client funds. Deutsche Börse therefore expects that the number of analysts covering a company will drop and the possibility to participate in conferences, roadshows and field trips will strongly decline – and the smaller an enterprise the stronger it will be affected by this. Although the impact cannot yet be accurately assessed in detail – we assume that issuers will be involved to a much stronger extent in the costs for the provision of research and corporate access (roadshows) in the future and that the banks’ and brokers’ commitment to take action for small enterprises, in particular, is likely to strongly decrease.

MiFID II as an opportunity for issuers – Establishing direct investor contacts

We believe the changes will have a strong impact on smaller enterprises and will result in the brokers’ declining interest to distribute unpaid research and organise roadshows.
Already today, the research gap can be easily filled with the help of several providers, who offer high-quality research that is paid by the issuer. It is important here to choose a high-quality product from a reputable provider. The so-called sponsored research can be obtained free of cost in the future as well.
When it comes to managing investor access the problems are much more complex: It is true that there is a broad offer of investor conferences ranging from the German equity forum and DVFA conferences to events organised by brokers and banks or independent service providers – and it really pays off to participate in these events. It can also be assumed that roadshows and events that are paid or organised by the issuer will remain free of charge for the recipient as “minor, non-monetary advantages”.
That said, concerning opportunities to establish a direct and company-specific contact to investors, supply is limited. A direct approach by the company itself can often be very difficult – the transparency on which asset manager or fund manager exactly is currently interested in certain sectors, scale and topics is low. Seeking qualified assistance from an external service provider can be very helpful at this point.

Conclusion: Taking an active approach to changes

A further professionalisation of the relations between issuers, investors and banks and the corresponding improvement of the market’s transparency and the protection of investors is generally welcomed. However, the effects of MiFID II will initially mean a deterioration of the possibilities to gain access to independent research and to investors particularly for small issuers – and with it also the possibility to raise capital through the stock exchange. Issuers are increasingly required to proactively address these challenges and to pave their own path to investors. Involving independent service providers will gain in importance, requirements on the performance of a company’s investor relations activities will increase.

[1] “The impact of MiFID II on the availability of research” – Deutsche Börse AG, December 2017

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