Amidst a landscape of evolving financial regulations and industry transformations, the latest findings from Extel’s rankings have sparked significant interest, particularly regarding the U.K. Small & Mid-Cap (SMID) brokers. The SMID sector has experienced notable attrition since the introduction of the Markets in Financial Instruments Directive (MIFID II) in January 2018. This directive was designed to enhance investor protection and transparency but has effectively altered the dynamics of equity research.
Prior to MIFID II, research costs for brokers were typically encompassed in their overall commissions. However, the new regulation mandated that these charges be separated, leading to a financial rethink within firms. David Enticknap, CEO of Extel, remarked that while MIFID II didn’t deliver a fatal blow to equity research, it certainly inflicted significant pain. This shift is glaringly evident in analyst participation. For instance, the number of small and mid-cap retail analysts has dwindled from 29 at the onset of the financial crisis in 2007 to just 17 today, while the count of support services analysts has seen a decline from 26 to 20.
Highlighting the changing landscape, longstanding firms like Investec, Peel Hunt, and Shore Capital persist, while other notable names such as Bridgewell Securities and Cenkos Securities have disappeared from the scene. Recent years have seen ongoing consolidation within the market, evidenced by Deutsche Bank’s acquisition of Numis Securities and Stifel’s withdrawal from the U.K. equities business.
Furthermore, the extent of sector coverage has diminished sharply. The 2007 SMID survey encompassed 18 distinct sectors, but recent rankings covered only nine, with entire sectors like Chemicals and Metals & Mining no longer represented. Nevertheless, following an Investment Research Review conducted by Rachel Kent in 2023, the Financial Conduct Authority has opted to ease regulations, permitting asset managers to bundle some payments for research and trade execution. This change could potentially revitalize interest and investment in the equity research field.
Enticknap remains cautiously optimistic, stating that the “seeds” for a recovery seem to be surfacing, contingent upon the buy side recognizing and valuing research outputs. He emphasized the necessity for fresh talent to invigorate the industry, noting the challenge in attracting recent graduates who are increasingly drawn to technology sectors rather than traditional finance. Encouraging them to perceive a career in equity analysis as a noble pursuit could prove essential for revitalizing the London market.
As the financial industry navigates these challenges and transitions, the implications for future growth and industry standards remain pivotal topics of discussion.
