Smaller-cap share issuers could be facing more expensive corporate access if the dealing commission shake-up proposed by UK regulator the Financial Conduct Authority (FCA) goes ahead, though the regulator’s proposed changes will improve broker transparency, says the UK’s Investor Relations Society.
‘If the suggested provision of corporate access does not meet the criteria under the use of dealing commission rules this may limit the possibilities of investor stewardship and place a resource and cost burden on issuers, something the FCA may have overlooked in its proposals,’ notes Laura Hayter, the society’s head of policy and communications.
As smaller-cap issuers rely on brokers to link them with investor contacts, they may be at a disadvantage under the new rules, Hayter suggests. And if investors pay less for corporate access from internal resources, brokers may reduce the range of services they are prepared to offer.
‘With a potential ban on the use of dealing commission to pay for research, this would also have more impact on mid-cap and small-cap companies that, with a reduction in coverage, may end up with limited visibility in the market,’ Hayter adds. ‘There is, therefore, the potential for erroneous valuations with a potential decline in the quantity of research on companies.’
The IR Society, however, welcomes the FCA’s review into dealing commission rules and how proceeds are used to pay for research services, praising in particular the ‘greater transparency’ any changes could promote.
‘From the corporate issuer perspective, there is currently some opacity in who is paying and what is being paid for, specifically surrounding non-research services such as corporate access,’ Hayter continues. ‘Asset managers should be declaring it if they are using client funds to pay for services. We would therefore welcome a more open marketplace.’
She goes on to say that while meetings with management are a crucial part of the investment process, issuers should ‘be aware of who is paying to see them’ and fund managers ‘should clarify to end-clients what they are paying for’, again in the interests of transparency.
Though Hayter says that it is difficult to make any recommendation to the society’s members before the FCA’s rules and guidelines are in place, she outlines five scenarios that may develop:
- Brokers and investors find a way to redefine corporate access as a research service, resulting in little change
- Companies rely on house brokers only to arrange roadshows, which might mean the quality of roadshows goes down due to lack of incentives
- Companies pay other brokers or third-party intermediaries to arrange roadshows – an added cost to corporates
- New and innovative ways to engage with investors develop, including web-based technology platforms to arrange roadshows. It may make sense for issuers and the buy side to embrace this
- Company internal IR departments grow and arrange their own roadshows – an added administrative resource and cost burden for companies, but a trend already being seen across FTSE 100 companies.
‘There is little question things will change in this area; the issue is by how much,’ Hayter concludes. In the meantime, the IR Society will continue to encourage its members to remain ‘closely involved’ with investor targeting and roadshow meetings.
