Last November’s Autumn Statement from the new Chancellor of the Exchequer, found Jeremy Hunt promising further regulatory changes to support the City of London and its position as an international financial centre, including changes to the MiFID II rules on equity research.
Joshua Maxey, co-founder of Third Bridge, comments that it’s an interesting turnaround given Andrew Bailey, now Governor of the Bank of England, but head of the FCA at the time, and his team were the architects of most of the research regulation within MiFID II.
“The policy framework of MiFID II as it relates to research was crafted by the UK and what we see now is largely a UK-led framework,” he says.
Maxey believes that now, post-Brexit, it’s convenient that the UK should say there are issues and want a new ‘UK version’. “It’s interesting and political,” Maxey says. “MiFID II is what the UK wanted at the time.”
Maxey does not believe that MiFID II will be completely unravelled on the back of this new initiative. “It would be difficult for the buy-side community to go back to investors and say we are now charging you for research,” he notes.
At the time that MiFID II was introduced, in January 2018, Maxey observed, that everyone jumped in and started paying for research out of their P&L, following BlackRock’s lead.
He says that Third Bridge has been relatively resilient to MiFID II. “We haven’t been as exposed because we also work with private equity where this is not so relevant and also with management consulting firms – but overall the impact has been that research budgets outside of the US have declined by about a third.”
“Everyone was taking stock of who they were using and rationalising their rosters, and rightly so, as many entities were overbroked. Research demand became ‘what we must have’ as opposed to ‘what is nice to have’. It caused a degree of rationalisation.”
Third Bridge’s name now appears in the top 20 spend lists of the buy-side and Maxey notes that on the sell-side talent is still draining away from the research houses, even if MiFID didn’t create the frenzy people predicted.
“I was always bullish for our business as MiFID levelled the playing field for us and democratised access to research to some extent.”
One of the unintended results of the MiFID II rules was that research for smaller companies shrank, a fact picked up by ESMA, who realised there was a gap as small companies were struggling to receive research coverage.
“That disconnect between large and small company research is concerning for diversification purposes,” Maxey says. The result was that ESMA revised its guidelines.
The number one feature of the sell-side that the buy-side value is access to management, Maxey says. “A large investment bank has corporate relationships with big companies in order to do corporate finance work, such as IPOs. Research is a loss leader.”
MiFID II set a clear line. “Obviously buy-side investors are still trading with banks and paying for research but the banks can’t appropriate any of those fees to the corporate part of their offering which creates an interesting dynamic. It means corporate access happens but at a different scale, now all the big funds work directly with companies themselves.”
Maxey predicts job losses coming up in the banking sector – Goldman Sachs hired 20,000 people in the last five years and announced 3,000 redundancies recently. “I expect to see more,” Maxey says. “The biggest impact will be felt on the investment banking side as a result of a drop in M&A volumes, which is 50 per cent off since last year.”
Maxey notes that research team headcount on the sell side is already declining, 15 per cent down each year over the last 10 years – from 4,500 to 3,000 people globally.
However, the primary research market has gone the other way – during the COVID crisis it grew 30 per cent and has nearly doubled to close to USD2 billion dollars in the last six years.
“This underpins our whole mission which is about satisfying investors who want direct access to human intelligence and insights – not secondary information which is arguably biased as it is penned by a bank and largely out of date,” Maxey says, confirming that his firm is expanding and hiring more people on the back of this structural change.