AFG, the French asset management association, and compatriot finance industry bodies have agreed on a charter of best practices governing sponsored research in a bid to counter a drop in company research coverage post-MiFID II.
Developing a charter on sponsored research – where listed companies pay research firms to cover the stock – was a recommendation of Jacqueline Eli-Namer, member of the board of the French financial markets authority AMF, and Thierry Giami, president of the French Society of Financial Analysts (SFAF), in a report published in early 2020.
The AMF had asked them to explore the initiatives that could be taken “to ensure that small- and mid-cap companies (SMEs) are covered by high-quality research”, saying that the implementation of MiFID II appeared to have led to a reduction in the number of analysts and companies covered by independent research while research sponsored by issuers was on the rise.
About the latter it said: “Although this has curbed the decline in research production, it raises specific issues, particularly with regard to conflicts of interest management.”
The charter that AMF announced last week was developed with SFAF and AMAFI, the industry body for professionals working in the securities industry and financial markets in France.
In its statement about the charter, the AFG said research production provided fundamental information for both investors and issuers, and that it was important to allow sponsored research to develop and play its part, in particular for the benefit of SMEs.
It said that since the implementation of MiFID II, the number of studies on companies on the Euronext Paris exchange was steadily decreasing, from 1,960 in 2018 to 1,732 in 2019 and 1,683 in 2021, while sponsored research was growing fast.
AFG said that the charter, which was developed in consultation with the AMF, defines the rules of transparency and objectivity and the methods of remuneration and dissemination that allowed sponsored research, paid for in whole or in party by the issuer established in France, to become “investment research in its own right”.
The association said Paris was the first financial centre to act on the topic of sponsored research and that its industry bodies hoped the charter would help inform discussions at a European level, particularly in the context of the EU Listing Act.
The EU Listing Act is a European Commission project aiming to make listing of both equity and non-equity securities on EU public markets more attractive for companies, in particular SMEs.
Neil Scarth, Principal at Frost Consulting, said the move by the French industry bodies was “the upshot of vastly reduced research spending by asset managers (particularly those funding research from P&L) post MiFID II”.
“The French are trying to create standards so that sponsored coverage can make up for the shortfall from the investment banks reacting to spending cutbacks, but in a way that deals with possible conflicts of interest so as to avoid potential consumer harm.”
He said the move by investment banks to rein in stock coverage had also prompted ESMA and the Financial Conduct Authority to remove MIFID II research requirements small cap stocks.
MiFID II introduced new rules on research unbundling, requiring asset managers to pay for research separately from execution costs. In Europe, most asset managers decided to absorb the cost of investment research onto their balance sheets rather than charging it directly to clients.
In its 2020 report, the AMF said asset managers were cutting back on research consumption, with budgets for spending on external research decreasing by 25% to 50% in 2018 and in some cases by a furher 30% to 50% in 2019, according to figures gathered by AFG.
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