Financial services companies have benefited from the trillions of dollars pouring into financial markets as a result of the ongoing process of market democratization. Today, however, the industry is discovering that democratization not only creates new opportunities, but also new responsibilities.
For at least 50 years the financial markets have become more accessible and cheaper. The powerful combination of improved technology and lower costs has drawn millions of individual investors into the markets. That trend accelerated dramatically with the introduction of commission-free trading in 2019, culminating in an explosion in retail activity on platforms like Robinhood.
With so many new investors entering so rapidly changing markets, regulators are acting to ensure a level playing field. In September 2020, the European Union went live with its updated Shareholder Rights Directive (SRD II). SRD II brought many profound changes, but two particularly stand out. In many cases across Europe, it has for the first time enabled issuers to understand who their underlying investors are. Also for the first time, retail banks and brokers were required to provide shareholder voting services to their underlying customers. EU regulators have recognized that good corporate governance is up to issuers and all investors who speak to each other. To do this, issuers must know their investors and all investors must be given the opportunity to vote – not just institutional investors, as has been the norm in Europe for many years.
In order to remedy the lack of transparency regarding the ownership of shares and to encourage the participation of the shareholders, SRD II required all banks and brokers to distribute the meeting documents quickly and securely electronically to all institutional and private shareholders. And while these rules have their origins in the EU, their effects are essentially global as the SRD II requirements apply to all intermediaries trading or holding European stocks.
SRD II has placed completely new responsibilities on many companies, which in some cases either have to develop entirely new solutions such as building a retail voting platform or have had to completely restructure their existing processes to comply with the strict new rules of SRD II, which are “without delay” Affects the dissemination of meeting and corporate actions materials.
Fulfilling these commitments has been a costly and arduous task. In addition to the logistical challenges that the new requirements bring with them, intermediaries also have to cope with different interpretations of the directive by the individual EU member states.
Fortunately for financial intermediaries, the trend towards democratization is not limited to the markets. It also happens in technology. Until recently, the only way for financial services companies to get the infrastructure they need for a task like SRD II compliance was to build it on their own. This largely meant that the most efficient solutions were limited to the largest companies with the largest IT budgets.