25 March 2016

Financial Times: EU rules set to hurt City and asset managers

There are 13 dense pages of prescriptive rules here on how bank and brokerage research analysts — and all those who work alongside them — will henceforth communicate with their investing clients.

On one level, this new rule book, just one part of the sprawling Mifid II reforms of Europe’s financial regulatory framework, is as you would expect. It pins down the issue of conflicts of interest and the accompanying need for anyone taking investment advice to be made aware of how that advice might be loaded.

But as you plough through the legalese, you begin to wonder how an asset manager might manage to communicate with a research analyst or a bank’s sales staff ever again.

What’s being attempted here is a detailed codification of every possible interaction between the sellside and the buyside across all financial markets. Every expression of an opinion on anything with a price (that might move) is being loaded with a seemingly endless list of disclosure requirements that will surely leave all those affected reluctant to voice any opinion at all.

This latest slab of regulation lumped on the financial sector has gone through all the usual backwards and forwards consultations and redraftings typical of European rule-changes — and Britain’s FCA has been involved at every stage. But the implications are only now trickling down to those at the sharp end, as bank and brokerage legal personnel try to explain how teams on their dealing floors are going to have to operate in future, and all those with direct client-facing roles go out and explain to their clients how it’s going to be.

There’s widespread confusion. Since everything is untested here, the actual legislation is being interpreted in all sorts of different ways. Some analysts are being told they can no longer offer specific recommendations to a buyside client by telephone or even in person; all communications will have to be written, if only to carry all the new disclosure requirements.

Asset managers, meanwhile, are being told by big banks that they will no longer be speaking with a salesman direct; he or she will have to be accompanied by specialist sales people and/or an analyst, along with a relationship manager, in order to communicate.

These changes are in addition to the well-flagged “unbundling” reforms that will come with Mifid II, whereby the costs of sellside investment research will have to be borne directly by fund managers, rather than charged to the underlying client funds.

No one really knows how unbundling will change the industry but there’s an assumption that the raw number of employed analysts will drop substantially and that coverage of smaller and medium-sized companies will be heavily curtailed.

Full article (FT subscription required)

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