The City of London’s brokers received an early Christmas present as it emerged that the threat of draconian rules on bonuses and research that had overshadowed them for much of 2015 was likely to be watered down.
However, the sector is still grappling with permanent structural changes: lower trading volumes, pressure on fees and better technology.
The challenges come as European regulators said in December they had delayed by a year restrictions on bankers’ pay— known as CRD IV — to give authorities time to craft exemptions for smaller lenders and brokerages. This has come as a relief for many brokers who were alarmed by the European Banking Authority draft guidelines, initially published in March, that would have subjected them to the same rules as large banks.
Now, the EBA, which sets out banking regulations for the EU’s 28 countries, has delayed the regulation until January 2017, allowing the EU to exempt “smaller and non-complex” institutions and individuals who get small bonuses from the full scope of the rules.
While these institutions and individuals will still be caught by a cap on bonuses at two times salary, under the proposal they would not have to split bonuses into cash and shares, or defer them over several years.
Brokers operating in the Square Mile were similarly relieved when it was announced in November that Mifid 2— new European regulation designed to shake up Europe’s trading landscape — will also be postponed by a year until January 2018. At the heart of this has been the issue of “unbundling”— the separation of asset managers’ research spend from trading commissions.
Now, officials have opened the possibility, under strict conditions, for asset managers to retain an existing transparency system for research charges, known as “commission-sharing agreements”. This means that managers could be spared the legal and administrative burden of having to unpick their existing arrangements.
This is a boon for small and mid-cap brokers who argue that a move by regulators to prevent asset managers paying for research out of client commissions would mean that they cut back their research spend, which would ultimately force brokers to retreat from research as well, to the detriment of capital markets.
Oliver Hemsley, chief executive officer of UK broker Numis Securities, said full unbundling has the “distinct possibility” of reducing research coverage of small and mid-cap companies.
“This will denigrate London’s position, drive up the cost of capital and eventually stop capital reaching these companies. Now that implementation has been moved out until the start of January 2018, we should think about the impact of this legislation,” Mr Hemsley said.
These regulatory headwinds came during a year in which both the number and volume of initial public offerings on Aim, the London Stock Exchange’s junior market, which this year celebrated its 20th anniversary, were down substantially compared with 2014.
Macroeconomic uncertainty surrounding May’s general election in the UK, an economic slowdown in China and falling commodity prices collectively took their toll on fund manager appetite for listings.
There were just 30 IPOs on Aim this year, raising £560m. That compares with 2014 when 80 IPOs on the junior market raised £2.8bn. Secondary fundraising increased 27 per cent to £4.15bn on the previous year.
However, there are signs that investors are backing slightly larger and more mature companies on Aim than in previous years: the average market cap of the 57 companies that joined the stock exchange this year was £100m, almost 40 per cent larger than the average Aim company.
The main market held up better, with the number of listings largely on a par with last year. In 2015, 60 IPOs raised £12.6bn, just below the £14.1bn raised by 58 IPOs on the main market last year. Figures for 2015 are up to and including December 18.
Performance among the small and mid-cap brokers has been polarised with those that receive substantial retainers from corporate clients or fees from M&A outperforming. For example, Numis reported record revenues in its latest financial year, as its growing mergers and acquisitions business offset a volatile year for IPOs. Revenue increased 6 per cent to £98m, and profit before tax increased 7 per cent to £32.7m in the 12 months to September 30.
At the other end of the spectrum, a recent profit warning from rival Panmure Gordon illustrates how a drop in equity issues and IPOs on Aim is taking its toll on the brokers advising these companies, who rely on the fees from these transactions. Two days before Christmas, rival Panmure Gordon said a “decline in capital market transactions” in the fourth quarter meant it expected to suffer a pre-tax loss of £4m-£4.5m this year, compared with a profit of £2.15m last year.
Recognising the new paradigm of falling secondary commissions, City stockbroker Westhouse Securities this month announced it was changing its name to Stockdale Securities and refocusing its business on winning and retaining good quality corporate clients and executing their transactions.
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