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Small company research not held back by new EU rules, regulator says

FILE PHOTO: European Union flags flutter outside the European Commission headquarters in Brussels

By Huw Jones

LONDON (Reuters) - European Union rules that shine a light on how much asset managers pay for research on small companies have not reduced the breadth of coverage, the bloc's securities watchdog said on Thursday.

Since January 2018 under the bloc's MiFID II securities law, portfolio managers must pay for research on companies themselves or pass on the cost to customers.

Previously, the costs had been grouped with other services, such as the execution of stock trades, making it hard for asset managers to determine value for money from research.

The European Securities and Markets Authority (ESMA) said in a research paper published on Thursday that it found no material evidence that unbundling rules had limited the availability and quality of research on SMEs and that longer standing issues were in play.

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"However, in absolute terms, SMEs continue to be characterised by a lower amount of analyst research, higher probability of losing coverage, worse quality of research and limited market liquidity," the ESMA paper said.

"This situation appears to have been neither improved nor worsened by the MiFID II research unbundling provisions," the paper said.

The overall quality of research has tended to improve following the implementation of MiFID II, it said.

The findings contrast with the views of EU lawmakers who have long argued the new rules inhibited research in smaller firms.

The bloc approved a "quick fix" package in December to help SMEs raise funds on markets to recover from COVID-19. It exempts unbundling of research on SMEs with a market capitalisation that does not exceed one billion euros ($1.21 billion).

($1 = 0.8287 euros)

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(Reporting by Huw Jones; editing by Barbara Lewis)