City warns of worse to come as EU rules squeeze UK brokers

Tough new rules imposed on the City by the EU are making it harder for small and medium-sized companies to raise funds, hitting a key area of growth for the economy, says a new study of fund managers.

The survey of investors by Peel Hunt and the Quoted Companies Alliance warns the quality of the research by brokers is getting worse, making it harder for fund managers to justify buying into potential growth stocks.

The study comes after the Standard revealed that broker Daniel Stewart is on the brink of going out of business.

Other similar firms are expected to merge or seek a bigger parent as they struggle for fees.

MiFID II, European rules that force brokers to charge for research rather than wrap it up in banking fees, have been devastating for much of the old-style City.

Today’s survey says two thirds of investors (62%) report since MiFID II was introduced, less research is being produced on mid and small-cap companies, with a third expecting further reductions in the volume and quality of research. 

Meanwhile 70% of fund managers said their access to research has decreased as a direct result of MiFID II. Of the UK quoted companies surveyed in the report, 25% said that MiFID II has had a negative impact on their business.

Steven Fine, CEO of Peel Hunt, said: “The unintended consequences of MiFID II that we have seen so far are just the beginning. Specialists will become generalists. Generalists will cover too many stocks and their product knowledge will dilute. Quality will decline, gaps will appear in the market and many smaller companies will de-rate.”

Tim Ward, chief executive of the QCA, said: “We are seeing a decline in the availability of research with a consequent perceived impact on liquidity.”