Mifid II Amendment Leads to Consolidation in EuropeanEquity Research Market

The EU's Mifid II amendment led to consolidation of research firms and emergence of new business models, affecting the equity research environment. Banks like Deutsche Bank and Société Générale have adapted by maintaining or forming research departments through joint ventures and partnerships.

author-image
Wojciech Zylm
New Update
Mifid II Amendment Leads to Consolidation in EuropeanEquity Research Market

Mifid II Amendment Leads to Consolidation in EuropeanEquity Research Market

The European Union Commission's 2018 amendment to the Markets in Financial Instruments Directive (Mifid II) has led to significant changes in the equity research environment across Europe. The amendment aimed to reduce investment product costs and prevent banks from pushing equity investments through sales-driven research, with the goal of increasing transparency and benefiting consumers and issuers in the long term.

Why this matters: The consolidation of research firms and emergence of new business models has significant implications for the quality and accessibility of investment research, which can impact investment decisions and affect the overall economy in the long run. The industry's continued evolution will likely influence the broader financial sector and investor confidence. The consolidation of research firms and emergence of new business models has significant implications for the quality and accessibility of investment research, which can impact investment decisions and have a profound effect on the overall economy. The industry's continued evolution will likely influence the broader financial environment and investor confidence.

Under the new rules, the costs of research and other services can no longer be passed on to buyers of fund units as hidden costs. Instead, asset managers are required to pay for research and other services directly, a move intended to promote independent research and give smaller companies better access to the markets. However, the reality has turned out differently than intended.

Small, independent research firms have disappeared from the market, and major banks have significantly cut back on their research departments. In Germany, Deutsche Bank and Commerzbank have taken divergent paths, with Deutsche Bank maintaining its economic and equity research while Commerzbank withdrew from research entirely, instead entering into a cooperation agreement with Oddo BHF.

The exodus from equity research extends beyond Germany, with banks such as Raiffeisen Bank International, ABN Amro, BBVA, and Natixis following similar trajectories. New business models have emerged in response, such as Oddo BHF offering equity research as an additional service to its equity sales platform. Around 70 analysts at Oddo BHF now cover European equities, with the firm's large customer base essential to making this model viable.

The industry faces additional pressures from the historic turnaround in interest rates and the rise of passively managed products. Market participants note, "Fundamental research on small and medium-sized companies is a real luxury item in such an environment," making it affordable only for the biggest players.

To remain competitive, banks are increasingly turning to joint ventures and partnerships. Société Générale recently formed a joint venture with AllianceBernstein, with the aim of creating a research giant employing around 750 people and covering approximately 1,000 stocks worldwide. The transatlantic research giant Bernstein aims to offer this extensive coverage, with Société Générale intending to become its sole owner by 2029.

While the Mifid II amendment was intended to increase transparency and benefit consumers, it has resulted in the consolidation of research firms and the emergence of new business models that the industry adapts to these changes with. The provision of equity research continues to evolve, with the full impact on investors andmarketsyet to be determined in the coming years.

Key Takeaways

  • Mifid II aims to reduce investment product costs and increase transparency.
  • Small research firms have disappeared, and major banks have cut back on research.
  • New business models have emerged, such as research-as-a-service and joint ventures.
  • Consolidation has led to a lack of fundamental research on small and medium-sized companies.
  • The full impact of Mifid II on investors and markets remains to be seen.