Traditionally trading commissions paid by institutional fund managers to their stockbrokers/investment banks for trading shares was a “bundled” fee which paid for trading execution as well as research and corporate access. Therefore the costs for research and corporate access were passed on to the fund managers’ clients as trading brokerage.
From January 3, 2018 as the MiFID II regulation came into force in the European Union this all changed and the impact will be felt around the globe, including Australia. MiFID II is the second phase of the “Markets in Financial Instruments Directive”, which aims to make European markets fairer, safer and more efficient. Part of the regulation seeks to increase transparency and make costs of trading and investing clear and explicit.
Research can no longer be distributed without explicit payment, otherwise it may be considered an “inducement”, and corporate access, when “provided” by a third party must be clearly and commercially priced and cannot be charged to the to the underlying investor.
Given capital markets are global, the impact of the EU regulation is far reaching. It affects Australian corporates meeting with investors in the UK, Australian fund managers with European clients as well as investment management firms and investment banks with operations in Australia as well as the UK/EU.
Corporate access for Australian business no longer free
One of the obvious impact for listed corporates are those going to the EU, predominately the UK, to meet with existing and potential investors. This has historically been a “free service” provided by investment banks whether this was to arrange individual or group meetings or present at a conference. Now, if a third party is involved there must be a commercial payment made by either the fund manager or the corporate.
One of the first changes is that many UK fund managers are no longer accepting invitations from investment banks to meet with the management of their corporate clients. We are also watching how overseas investment bank conferences, which often give Australian corporates the opportunity to present their investment case to larger numbers of potential investors will evolve, as fund managers historically haven’t directly paid for their attendance. The context to this is that corporate access has been a “free” service to the fund manager and now fund managers will need to pay directly out of their revenues in an era of fee pressure.
Given the global nature of participants, these practices will also apply in other jurisdictions, for example, they apply to Australian arms of a fund management firms which are managing money for UK investors. Therefore we believe global firms will start to apply the new rules even if similar measures are not adopted each jurisdiction, notwithstanding we expect regulators around the world to consider applying a similar regulation.
The upshot is that, we believe, this regulation will become global in practice, and many Australian fund managers we talk to agree.
Another implication for Australian companies is that they will need to take more control of their international roadshows and targeting of potential offshore investors. We expect the burden will fall on investor relations teams to organize meetings with their current shareholders and seek out non-investors. Current investors are well known to the companies, but non-investors are more of a challenge. Although there are many well-known large management firms, there is also an array of new institutions being created which are winning investment mandates. At the same time there will always be others which become less important or are not long term in nature. How companies approach this task, may involve adding resources to their investor relations teams or using a third party with specialist skills in this area. Either way we expect investor relations costs to rise.
Certainly the world has changed in corporate access.