The unforeseen consequences of MiFID II

It's good to be at the front of the conversation. And when it comes to ESG, it seems we most definitely are.

Nordea On Your Mind lit a flame under the great ESG debate back in May 2018. And, like a rolling stone, it looks like the story’s gathering pace.

Remember Mifid II? You ought to. It’s less than ten months since it came into force, but, as well as strengthening protection for investors, an unforeseen consequence of the reforms has been to accelerate the squeezing of the number of equity analysts.

At least that is, those covering a typical European listed small- or mid-cap company. No less an authority than The Financial Times has jumped on this, citing our very own Nordea On Your Mind edition of May 2018 which highlighted that trend in the ‘Liquidity Drought’ issue.

The EU reforms have made it much more difficult and complex for fund groups from letting their customers pay for research through commission on trades, creating a research vacuum in which the banks are increasingly jostling for space.

“When Mifid II came into existence, no-one could really know how it was going to impact the industry but now we can see that it has been profound,” says NOYM founder Johan Trocmé. “There was scepticism as to how the initiative would play out, but there is a much greater sense of urgency among smaller listed companies now.”

“It becomes a big problem if you are a small-cap listed corporation,” he says. “In fact, we have seen things pan out pretty much as we highlighted and there is no reason to expect this trend to change.”

That has of course played into the hands of the burgeoning commissioned-research segment which has jumped into the void as customers clamour to fill the knowledge gap.

“This used to be something of a cottage industry and now it’s becoming something on a more industrial scale,” Trocmé says. “The big banks have entered into the fray with a vengeance with a revised and modernised offering that complies with Mifid II.”

Can commissioned research plug the gap? Trocmé sees no reason why it can’t at least cover some of the bases. “More customers are signing up for commissioned research,” he says. “Only time will tell how much this segment is going to grow.”

Source: Nordea, FactSet

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