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Problems caused by MiFID II

Saturday, January 13, 2018 14:24
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I’ve heard a lot of discussion, and moaning, from my friends amp; contacts in the City over recent months, concerning the apparently onerous regulatory changes being introduced by the EU’s MiFID II (Markets In Financial Instruments Directive). This is a European Directive, but before Brexiteers get over-excited, apparently UK regulators had major input into its drafting.

The intention behind Mifid II seems to have been to make investment markets more transparent, and for consumer protection. However, from what’s happened so far, like a lot of regulations, the actual impact seems to be the opposite of what was intended.

Probably like most of you, I’ve recently had letters from my various brokers, asking me to sign bits of paper. I didn’t really pay a great deal of attention, as admin bores me. However, my main broker just said that the new rules would restrict my access to research notes, so the easiest thing would be if I requested to be registered as a professional client. This means giving up some protections, but I went ahead with it anyway.


Segregation of Funds

My main broker (Spreadex) segregates all client funds already, whether they are retail or professional clients. Plus, my view is that if fraud were to occur with any broker, then the rules over segregation of funds would probably be flouted by determined fraudsters. So it’s questionable whether this supposed protection for retail clients would actually be adhered to in a broker meltdown type scenario. I’ve always thought that the best way to protect against fraud or some unforeseen broker collapse, is to spread your money around several financially strong brokers.


Companies House

Plus, I always check the published accounts of brokers, which you can do free, for any UK company,  at companies house website here - well worth bookmarking that page – I use it a lot. Spreadex has a strong balance sheet relative to its size, so I’m happy to leave most of my family’s money with them. Larger spread bet companies IG Group (LON:IGG) and CMC Markets (LON:CMCX) also have strong balance sheets.

Companies House website is also useful in everyday life, e.g. when paying deposits to builders or other contractors. It’s worth checking Companies House website, to ascertain their financial strength amp; how long their company has been around, before parting with your money. I learned this lesson the hard way, after losing my deposit when ordering some blinds, and the company went bust before anything was delivered. Had I checked their accounts beforehand, I wouldn’t have given them any money up-front, as they were obviously insolvent. Paying on a credit card is also a good idea in this type of situation, as that affords some consumer protections, I believe.

Intermediary broker for spread betting

I’ve found that spread betting accounts are too dangerous to be under my control. Money constantly leaks out of my accounts due to my stupid punting on indices, and other things. I dread to think how much I lost in my IG accounts last year, punting on Bitcoin. This has tended to dissipate all my small cap gains, unfortunately, and it’s really down to a character flaw in me – I enjoy punting, but am rubbish at it! However, my core small caps stock-picking is usually very successful. So my key aim is to focus on the small caps stuff, and stop or at least curtail my punting.

Therefore, I found a neat solution – I use an intermediary broker to work my orders, and then place the small cap trades only on my family’s Spreadex account. To stop me doing anything compulsive amp; stupid (i.e. punting on indices, etc), I asked for the Spreadex website to be put into read-only access for me. Therefore I can monitor exactly what’s going on, but I can only place trades by phoning up my intermediary broker to request he places a trade for me. I’m usually too embarrassed to ring up requesting punts, so they rarely happen.

Putting this firewall between me and the dealing interface has been astonishingly effective, as it stops me punting on the Spreadex account. If I told you the % gains that have been achieved on the Spreadex account in the last 2-3 years, you just wouldn’t believe me. Think BMUS returns, turbocharged with gearing of 2-3 times. So we’re talking over 1000% gains in just over a couple of years. Obviously the clever bit will be hanging on to those gains in the next bear market. Given my track record of spectacular gains (2002-2007), then blowing up in the crash of 2008 (due to being geared up on illiquid stocks that I couldn’t get out of), I’m very mindful of the risks, and how to avoid repeating the same mistakes this time around.

How did we get on to this? Oh yes, so I talk to my broker a lot – multiple times per day in fact, as there’s nearly always something interesting going on in the market, and I am constantly finding new investment ideas, as a result of ploughing through so many trading updates amp; results statements, written up in the Small Cap Value Reports.

If you’re constantly buying new stuff, that means that you also have to be constantly selling old stuff, in order to free up cash for the new purchases. Hence I’m probably a more frequent trader than most people, whilst also keeping lots of my main positions for the long term (2 years+). I’ve never seen the need to identify as a trader or an investor – I like to do both. If there’s an opportunity for a quick profit, on some game-changing news, then why not grab it? I don’t see slow gains as being somehow morally superior to fast gains. Surely fast gains are more attractive? Generally I only buy shares where I see 50%+ upside. If that price goal is achieved in a month or less, then that’s fantastic. If it takes a year or two, then that’s good, but it’s tied up my capital for longer, so that’s less appealing than a faster re-rating. Also, some companies I like to hold forever (providing the newsflow remains positive). One position I’ve held continuously for 14 years!


Broker notes

Given that I talk to my broker a lot, and he earns quite a lot in commission from me, then he is very helpful in sending me broker notes each morning, on stocks that he knows I’m looking at. Having used the same person as my broker for almost 15 years (through 3 companies), he knows exactly what type of shares that I tend to like. Also he helps me greatly with my SCVR-writing, by emailing me relevant broker updates on small cap companies which are reporting that day. So I can incorporate changes in broker forecasts into my reports, and thereby inform SCVR readers who may not themselves be able to get hold of forecasts in such a timely fashion.

It’s worth noting that Research Tree is a wonderful service, which I also find very helpful in providing me with some broker information. I very much hope that more brokers sign up to provide their research to a wider audience via Research Tree. NB – for the avoidance of doubt, I have no commercial relationship whatsoever with Research Tree, I just find it a useful service, so am happy to recommend it.

MiFID problems

Anyway, last week we ran into MiFID II problems. I was looking at a company that a friend recommended to me, so I emailed my broker as usual, to request broker research on it. The response, for the first time ever, was, “Sorry Paul, we’ve got some research on it, but unfortunately compliance won’t let me send it to you, because of MiFID II”. What a bloody nuisance! That has brought my research process on a potentially interesting company to a shuddering halt, as I don’t now have any estimates for future profitability for this company. There isn’t enough information in the public domain for me to make my own profit forecasts, so it’s now impossible for me to value the company – as valuation hinges on future profitability.

EDIT - just to clarify, registering as a professional client helped me maintain access to only some, but not all research. End of EDIT.

I accept that broker notes are often wildly wrong, in terms of profit forecasts, but at least it’s a starting point. Without any forecasts at all, buying small cap shares is just going into the realm of punting, guesswork. That makes it a lot less likely that I will buy a share. So I feel this could have serious implications for the UK small cap market, in curtailing activity. If we can’t get hold of research, and there are not even any published consensus forecasts available on websites such as Stockopedia, then I think small caps might see reduced investor interest, which would harm liquidity amp; the attractiveness of investing in small caps.


Access to research

My broker briefed me on how MiFID II has changed things. Apparently the principle is now that research activity of brokers (i.e. producing research on listed companies) now has to be separated from commissions earned from client trades. Tamzin at published an interview with Rob at Research Tree, explaining the issues around MiFID II. The subject matter is rather dry, so I had to watch it twice for it to sink in.

My broker tells me that he’s had a series of negotiations with the big research providers, as they now need to charge for access to their research. Individual research brokers are asking for typically £10-20k each, for my small broker to access their research. The trouble is, some of them won’t then let him email their research on to his clients such as me! (even though I’m registered as a professional). Obviously, he has declined those invitations. That has now shut off a useful source of broker notes for me amp; other clients. So MiFID II is now actively harming my interests, not protecting me at all.

My broker can still email me some broker research. However, this is now generally limited to house broker notes, which are classified as being marketing promotions, paid for by the company, I think. So house broker notes are now classified as commissioned research. There probably won’t now be anyone else publishing research on many small cap companies.


Commissioned research

So, broker research, especially on smaller caps, now seems to be reducing considerably, and access to it is being greatly restricted by MiFID II. This means that commissioned research from Edison, Equity Development, and others, is likely to become much more important. Personally I like commissioned research. This is effectively the company’s own forecasts, being published through an intermediary. It will generally paint an optimistic picture of course, so I usually adjust the figures down a bit in my mind, when deciding whether or not to buy any share. Also, I always completely ignore buy/hold/sell recommendations, which are totally meaningless. Price targets are also usually best ignored, although sometimes can be useful. Research notes on speculative companies is nearly always pie in the sky, but I rarely invest in blue sky type shares, so that’s not a concern for me.

It’s the main content (narrative) amp; forecasts of broker research which are the important, useful bits, which often inform amp; educate on a company’s operations, and sector. We can tweak their numbers, to arrive at more cautious forecasts ourselves, which is easy enough to do. In that way investors can easily construct a series of forecast scenarios ranging from optimistic (what the research note says), down to pessimistic (e.g. adjusting sales down by, say, 10%, leaving overheads unchanged, and seeing what profit number drops out).

Hopefully there might be an increase in commissioned research, to plug the gap which is now being created by MiFID II driving down the amount of other research being produced.


Email from Brian Basham

Brian is a PR guru, who pretty much wrote the book on financial PR, and was embroiled in all sorts of big corporate battles in the 1980s. So a fascinating, highly experienced, and influential figure, to this day. He’s mellowed a lot since those swashbuckling 1980s, and has been a great friend to me over the last 10+ years – giving me lots of wise counsel, support, and many enjoyable discussions over long lunches! Behind the scenes, Brian has been very actively campaigning on many important issues, such as banking regulation, bad corporate culture, to protecting rural pubs, and was instrumental in restoring the two minutes’ silence on Armistice Day.

Anyway, whenever there are important issues under discussion in the financial world, I often receive illuminating emails from Brian. Yesterday he sent me one such email on MiFID II, having seen my comments on it in this week’s SCVR. I thought the points he made were so interesting, that they deserve a wider audience. So I asked (and was granted) his permission to reproduce his email below, so here it is;


Many thanks. MiFIDII is ridiculous overkill. It stems from the 2008 banking crisis and the FCA, its principle author, has seized the chance to get its regulatory nose deep into the investment trough, even though there has been no major investment fraud other than Madoff and that had nothing to do with broking.   

However, it forces transparency and that was at to root of my thinking when I started ED [note: Brian founded, and currently owns Equity Development] . In a way MiFID has just caught up. Sadly, though, it puts all the power in the hands of the big banks.   

I have long believed that quoted companies should regard research as a listing cost. They should be obliged to commission and pay for research by authorised providers on the grounds that they have an obligation to keep their shareholders informed. The providers should be voted on at the AGM, just like auditors.   

Research should be provided twice a year for small companies and four times a year for majors. Of course providers would come under pressure but at least the process would be transparent and the shareholders would have a role in judging the outcome. From long experience, it’s my view that any other process is open to pretty serious corruption.


 I then replied to Brian’s email as follows;

Hi Brian,

Yes, I very much agree with you. I wonder how many of the people creating all this regulatory stuff (Mifid II is apparently 1.4 MILLION paragraphs, and still rising) have any experience at all of working in or using the financial markets?   

Regulation seems to actively work against the interests of private investors, by stopping us getting hold of research. Madness! Hopefully an opportunity for ED.

Regards, Paul.



I then received the fascinating reply below, which I emphasise Brian has given me permission to publish (at my request, as I think his thoughts deserve a wider audience, and to stimulate a discussion)  – I would not dream of publishing any emails without specific permission from the sender.



Sadly I think that the people who actually write this stuff DO have deep experience of working in financial markets. They are the big banks who know that complex regulation crushes those small businesses that might grow to become competitors.   

The giants know that they can employ grunts by the barrow load to navigate the regulatory maze, leaving the movers and shakers free to make money.   

When it comes to small companies, the burden of regulation usually falls on the CEO or FD and that inhibits the growth of the business.  Just look at the business I ‘invented’, Archover. Regulation tied up the CEO Angus Dent for months. Now that it’s an established business, it sees regulation as a barrier to entry for potential competitors.   

As for the Government’s much vaunted support for ‘challenger’ banks and sources of finance, forget it. Crushing regulation will ensure that it won’t happen. It’s a vile stitch up that is all the more unfair when you consider the comparison with the gambling sector. If I wanted to punt £10k on a horse, I’m sure I could find a taker no questions asked. The law accepts my right to take that risk with my money. If I want to do the same with a small company, I have to jump through all sorts of suitability and KYC hoops – I’m told that Rathbones are even subjecting clients to psychometric testing, just to protect their back.   

There is no regard in that process paid to the resources available to the ‘punter’ to make a sound judgement and that’s just ridiculous. In both cases, the punter has his or her residual knowledge to rely on. In the initial assessment, the processes are remarkably similar.  For a horse, the punter might look bloodstock line, the trainer, the jockey, the form of the other horses, the ‘going’; soft, hard etc and media views.   

In the case of a company the punter can also look to the ‘bloodstock line’, as represented by the record of the principal promoter of the company; he or she can asses the reputation of the jockey, or CEO and can look deeply into the success or failure of other companies supported by the brokers to the business. 

Finally an assessment can readily be made of the company’s competitive position and the state of the sector, loosely, the going. Media views, such as your own, can also be an invaluable guide.     

But there the comparison ends. The only documentation available to the racing punter are publications like Timeform, which is totally unregulated and is even owned by bookmaker, Paddy Power Betfair.    Contrast that with a public company, where even the most lightly regulated exchanges insist on companies providing a mass of information and where all companies are subject to the Companies Acts. 

As a result investors have oceans of highly policed information available, starting with annual reports and accounts, interim and preliminary reports, highly regulated announcements on any price sensitive developments. They have the absolute right to attend annual general and extraordinary meetings to question the directors. The companies must maintain a web site and a register of shareholders and, until now, brokers and others published regular research. 

We know that smaller companies are the backbone of the economy. I have long believed that the smaller quoted company sector, should be the pinnacle of the sector. Theoretically these are the companies that have survived scrutiny by armies of accountants, lawyers, finance houses, brokers and the chosen share exchange itself. Sadly, those companies are denied investment by crushing suitability regulation and now they will be denied information by Mifid2. 

That’s a huge shame because we have an ageing population that needs to save to survive and the smaller company sector has not only performed well ,but the companies are entities with which people can identify. For the record in 2017 the FTSE Small cap grew 14.2 per cent whilst the FTSE 100 managed just half that at 7.1 per cent. It’s much the same picture over three years with small caps recording 35.4 per cent and the FTSE 100 growth showing 17 per cent.

That’s a huge shame because we have an ageing population that needs to save to survive and the smaller company sector has not only performed well but the companies are entities with which people can identify. Potentially, that’s not just good for the investors it’s also good for capitalism itself.    It’s what your hero Thatcher tried to create with her privatisations- ‘popular capitalism’.   Of course, punters, investors, call them what you will need to be educated but that’s the minority, there will always be idiots, gambling, investing, drugs, drink. It’s always wrong to regulate the system to accommodate the lowest denominator.   Sorry about the rant but the whole FCA is f***ing ridiculous. 

Under Andrew Napoleon Bailey they are leaning on the investment market as a whole in the wake of the 2008 crash despite the fact that it was a BANKING failure and nothing to do with investment!

 They are not only ridiculous they are colluding with the banks they should be prosecuting, to destroy the real wealth creators, the small companies that are the soul and spirit of the economy. 

 Best   B


Very interesting perspectives, I think you’ll agree. Brian has started Tweeting recently, and can be followed @brianbasham . I should warn you that he’s a socialist, unfortunately, but we all have our faults!

Other broker comments

Brian also forwarded some comments from his own broker/fund manager whose reaction to MiFID II is as follows;

Historically I would guesstimate that I received circa 300 emails a day, of which circa 250 were probably research-related in some way.  We were under instruction that from MIFID2 D-Day on 3rd January we were not to receive any unpaid research work and must refer any questions in this regard to our compliance department.

From 3rd January the only pure research article I believe that I received was from Equity Development, which I referred to compliance and who responded and confirmed that it was okay to continue to receive


It seems to be the case that commissioned research is OK under MiFID II, but other research can only be received if it is paid for by the receiving party. That’s my understanding anyway. Therefore, a lot of research is likely to simply stop being produced. Maybe new commissioned research companies will pop up, to fill the gap in the market.



My feeling is that, from what I’ve seen MiFID II seems to have tried to fix problems that don’t really exist. What on earth was their thinking, in disrupting (not in a good way) the investment research market? The end result seems to be that investors will get a lot less research. How does that help us? Clearly it doesn’t. Still, the financial community is resourceful, so I’m sure companies will be looking for ways to get round these new regulations – maybe forming offshore companies that provide research on the internet?

Hopefully, post-Brexit, a future British Government might simply tear up a lot of the pointless and counter-productive regulatory burden on listed companies. I was going through the Annual Report of Carillion earlier today, and thought to myself what a load of useless garbage has to be included in Annual Reports these days. It must cost companies a fortune to produce usually over 100 pages of largely useless information.

I’m all for regulations in areas where it really matters – such as safety regulations that save lives. However, it seems to me that regulations in the financial space seem to mainly place unnecessary burdens on honest people, yet criminals seem to still get away with it.

So far, MiFID II seems to have back-fired. From the (admittedly limited) things I’ve seen so far, it has only detracted from my ability to source good quality information about companies.

What do other people think? I’d like this post to be seen as the starting point for a discussion on MiFID II and related issues, so please add your comments below. Does anyone think there are positive outcomes likely from MiFID II?

Regards, Paul.



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