The Brexit Regulatory Bonfire Begins...in the EU

(Bloomberg Opinion) -- One of the biggest ironies of the Brexit crusade against “suffocating” red tape from the European Union was that the U.K. was at the forefront of some of the bloc’s most onerous financial regulation after the 2008 crisis. 

That included a crackdown on opaquely-funded investment research — rolled out across the EU in 2018 as part of the MiFID II financial rule-book reforms — which forced fund managers to budget and pay for investment research ideas separately from actual trading and investing. This so-called unbundling brought more transparency, but led to higher costs and an all-out price war, predictably won by banks charging $10,000 a year rather than independent analysts charging $2,000 per PDF.

The end result has been a hit to research spending of as much as 50% annually as fund managers tighten their belts, and a drop-off in company coverage as the market shrinks. At the biggest banks, European analyst headcount fell 14% between 2013 and mid-2018, according to Coalition.

Today, with the ink on the Brexit deal barely dry and the Covid-19 pandemic shifting the EU’s priorities toward boosting growth, the continent is taking back control. A lobbying push to relax MiFID research curbs led by asset managers, bankers and even national regulators in countries such as France and Germany is gathering pace. EU authorities are mulling special exemptions and incentives to boost research coverage of small-to-medium-sized companies, according to government documents seen by Bloomberg News, in order to help the economy get back on its feet.

While it took the EU seven long years to put MiFID II together, the bloc’s 27 member states may be able to agree on key tweaks diluting it within a matter of months. Bloomberg Intelligence analyst Sarah Jane Mahmud reckons a more relaxed set of rules could be in force by the end of this year, possibly ranging from lighter research-budget reporting requirements for small asset managers to an outright exemption from unbundling for small businesses and independent analysts.

The idea would be to expand the marketplace of ideas and improve competition, with regulators keeping a close eye on how big banks price their research. More research and more trading would ideally encourage more firms to tap markets for capital and give investors confidence to buy shares.

All this is happening while the supposedly light-touch U.K. sticks stubbornly with the original rules. British asset managers and regulators dispute that small-cap coverage is getting worse — they see it as reassuringly selective — and argue that less research spending is a saving for the end investor. They may have a point about the dubious quality of those ubiquitous PDFs in the pre-MiFID days, but one study suggests the curbs hurt fund performance. It’s also strange that U.K. regulators seem so relaxed about the downsides of the new world, including a pricing out of smaller research shops. Still, judging by the Brits’ support for unbundling, it’s possible post-Brexit Europe will see Paris cut red tape while London keeps it.

For now, the talk in Brussels is of tweaks, rather than massive deregulation that would raise worries over consumer protection or regulatory whiplash. What’s unclear is how much economic benefit the EU stands to gain. It’s hard to imagine quick fixes to MiFID registering much at all on a pandemic-stricken economy that’s going to contract deeply this year.

Given the industry shake-out that’s already happened, with asset managers having established new research structures and analyst staffing numbers in a steady decline, this may be a case of too little, too late. It’s also unclear what it might mean for post-Brexit financial market access between the U.K. and the continent, given so much depends on regulatory alignment between the two jurisdictions.

A more promising regulatory road to growth lies elsewhere. If the EU were to deliver on its long-promised capital markets union, there would be a potentially much bigger boost to companies and the economy. The EU’s 27 stock markets are still too fragmented when compared to the depth of London’s market. The combination of Brexit and Covid-19 are a reminder of small firms’ need for diverse and dependable funding sources. Bonfires have their benefits, but sometimes it makes sense to build something new instead.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

©2020 Bloomberg L.P.

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