The European Commission has proposed effectively rolling back some key reforms brought in under MiFID II, including the requirement for investment banks to separate equity research from equity trading.
So-called unbundling came in across the European Union in 2018 after more than six years of wrangling over MiFID II – or the second markets in financial instruments directive – which threatened the business models of many equity-focused investment banks.
In its latest update on capital markets union, the EC has said unbundling should only apply to listed companies with a market capitalisation above €10bn.
That would mean more than 95% of companies listed in the EU could revert to the previous arrangement where brokers could wrap the costs of research and related services in with charges for executing trades relating to the companies.
The proposal is out for consultation and would not come into force until after the EU legislative process is complete, which could take several years. That would still mean unbundling was in place for less time than it was discussed prior to coming into force.
A year ago the UK exempted smaller companies with a market cap of below £200m from unbundling, but that low level meant it only applied to a small proportion of all listed companies.
Other proposals outlined by the EC this month regarding capital markets, such as relaxing the prospectus and other listing requirements for smaller companies, were seen by some observers as broadly copying UK proposals in these areas. Others saw them as irrelevant as some exchanges in the EU already allowed most of the measures.
For example the minimum free float requirement for a listed company is to be reduced from 25% to 10%, something the UK had proposed a year ago.
“Some EU venues, such as Amsterdam, already have this,” said one equity capital markets banker. Another proposal for dual-class shares is in place in Amsterdam too. “This is largely tinkering around the edges,” the banker said.
The unbundling proposal is seen as a divergence from the UK, and could put pressure on London to follow suit to avoid a bifurcated equity market across the EMEA timezone, particularly now UK regulators have to consider competition as part of their remit under proposals by UK chancellor Jeremy Hunt this month as part of his Edinburgh reforms package.
The Edinburgh reforms could accelerate the UK’s slow path to setting a fresh direction for financial services post-Brexit. They also included a plan to look at research unbundling exemptions as well, without any specific proposals.
“The proposals were largely an aggregation of things already in the pipeline. But the UK has signalled it is open for business and keen to make it attractive but this is a beginning and certainly not the end. It will take five years at least,” said Etay Katz, financial regulation partner at law firm Ashurst.
The EC also set out plans to harmonise corporate insolvency rules, a long-held ambition. Restructuring lawyers said these proposals were unlikely to knock London off its spot as a creditor-friendly jurisdiction to get workout deals done. That is largely because the EC proposals involved onerous duties for directors to file within three months of becoming insolvent, and a requirement for court approval to appoint an insolvency practitioner ahead of a pre-pack administration deal.
Kon Asimacopoulos, restructuring partner at law firm Kirkland & Ellis, called such requirements for mandatory filing “a retrograde step”.