I was torn about whether to write anything about the official end of the ‘no action’ letter from the SEC on MiFID II (it expired last week). I feel like everyone (including myself) is tired of hearing about “unbundling” and MiFID II – but it was a slow week, and between the 4th of July, and the 1st of July (for those, like me, based in Canada), I had a little extra time, and I was going to share some thoughts – but being a procrastinator and not getting anything out last week has led to even more interesting developments coming out out this week. 

The UK is jumping out of the pan and into the fire once again. 

Before that though, a little background.

In case you missed it, the SEC’s No Action letter officially expired on July 3rd. That means that US brokerages no longer have a pass to accept hard dollars from MiFID subject clients in addition to the traditional soft dollars. The era of regulatory harmony is over. 

I’ve written a lot of MiFID II over the years, and my view has been very consistent so I won’t go into too much detail, but you can see my old blog posts online. Suffice it to say, I thought the regulation was academic in nature, poorly designed for the realities of the ecosystem in which it was to be implemented, and disastrous for many in the industry. The intentions were noble, but the results have been disastrous. As I laid out in previous pieces, the idea of trying to put a discrete value on every piece of information loses the forest from the trees – that’s simply not how the human brain works. You mine mountains of information to find a possible gold nugget, but you never know where fortune will strike. Additionally, I had zero doubts that the US/SEC would never be dictated its policy by any foreign regulator or government, including Europe. 

When doing a final post-mortem on MiFID II, I go back to one of my favourite quotes by Milton Friendman: “Judge public policies by their results, not their intentions.” While the policies may have been well intentioned (more transparency, accountability to asset owners, etc.) the results have been far from the goals.

It turns out the UK Government agrees with me – and as of this week (specifically, Monday evening UK time), they have announced the beginning of rebundling in London. That’s right – the rules are being rolled back, and brokerages will be able to bundle trading and research (among other changes). It’s not surprising, given that is the direction the EU is going as well, and as I’ve talked about many times before, the war is actively waging for who will end up with the financial markets capital of Europe (will it be the legacy in London, or somewhere new like Paris or Frankfurt?).

With one poor policy on the way out after almost a decade, you might think the worst is behind the European regulators and government. They’ve learned that intervention in an otherwise free market, without the context and historical perspective of changes, and without deep industry consultation, can lead to unexpected outcomes. 

But instead, we heard something else from the UK government today: “you thought unbundling was bad? Hold my beer”.

They have a new plan to resolve the access to research issues. In addition to rebundling, they are going to launch (wait for it): a research aggregator!

That’s right, the stroke of policy genius is to launch the mother of all research portals, with lots of fun twists that I’m sure are going to keep compliance teams busy, and brokerages staying clear. Here are a few interesting highlights from the plan:

• It’s not clear who will fund such a portal, but there are expectations that the taxpayers either provide ‘seed capital’ or perhaps the LSE will be asked to fund it

• In addition to use by ‘investors’ (which I assume means institutional, or at least hope), it will also be open to retail investors. Welcome to an entirely new quagmire of compliance nightmares, as no brokerage is going to open up the pandoras box of retail investor KYC and sophistication tests

• It also sounds like they will turn it into a platform for Corporate Sponsored Research – while I’m actually an advocate of corporate sponsored research in theory (allowing firms to essentially sponsor high quality marketing material to investors with full disclosures), I’m not sure how you’re going to mix CSR and institutional research together in one platform

Aside from the strange logistics of the plan, let’s not forget that this has already been tried in several permutations, and the same challenges always emerge.

Post MiFID, there were countless research platforms that sold themselves as ‘marketplaces’ – and they all failed. Institutional investors don’t want another aggregator (they already have lots), and retail investors don’t want to pay for research.

Additionally, brokerages don’t like aggregators – they are seen (fairly) as a disintermediator between them and their clients. If they don’t like putting their research on Bloomberg, why would they put it on the UK government’s aggregator, or even worse, Refinitiv’s (who is owned by LSE, who I’m sure would take on this project if the government asked)?

But let’s be optimistic and say you do launch an aggregator, and let’s say you do somehow convince every brokerage (or the majority of them) to contribute, let’s say you somehow harmonize CSR and brokerage research, and lets even say you somehow figure out an economic model that doesn’t just become another toll booth on the industry. Let’s say all those things happen: who is going to manage entitlements? They are already a disaster on existing aggregators like Bloomberg, but at least there is a $30,000+ a year hurdle to getting on Bloomberg. What if you let every retail investor in the world jump in the pool? Good luck.

Finally, this is about what kind of research the government thinks it needs (small and mid cap companies), and should be tailored to such. I don’t think anyone is arguing that mega cap companies like Apple need another analyst covering them, or suffer from a lack of coverage. The target is small to mid-cap companies (which is why you had the first DOA iteration of rebundling research on companies under an arbitrary market cap like $1B being before this broader iteration). These small to mid sized companies were covered by (surprise) small to mid sized brokerages and IRPs. Those are the firms that were most hurt by unbundling, as they had very few products to sell outside their research offering, whereas the larger firms could cross sell, and cross subsidize their products. 

If you want to increase coverage of small to mid cap companies, help the firms that cover small to mid sized companies. The firms that were most hurt by unbundling. Be more direct. Be specific.

When thinking about the next iteration of ‘solving research coverage’, I would encourage the UK Government to take a note from the Hippocratic Oath: “first, do no harm.” When thinking about what comes after MiFID II, perhaps removing the regulation that caused the issues in the first place is a good enough place to start. Let the dust settle, talk to the industry, and then work through iterative, small changes. The industry has evolved the way it has for a reason. Seek to understand those reasons, then assess whether they truly need to be changed.

And please, please, don’t launch another aggregator.

So it looks like we’re finally out of the pan, and MiFID II is officially over in Europe. The race is now on to see who can rebundle fastest, as the continent jockeys for financial markets position in a post-Brexit world. The question now is are we out of the pan, only to head into the fire? What regulation will come next? Or will wiser heads prevail, and take a breather before jumping to the next thing?

Time will tell

As always, we’re here to help,

Blair

Blair Livingston

CEO

Street Context

 

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