Small Caps

How a European rule quietly made small-cap investing harder: what the research gap still means for you

How MiFID II's research unbundling rule emptied small-cap analyst coverage in the UK, why the FCA and EU reversed it, and what the gap means for retail investors.

By Cameron Oliver · May 16, 2026

The piece of regulation that did the most damage to UK small-cap research in the past decade was not aimed at small-caps at all. It was a sprawling European directive called MiFID II, written to clean up the financial services industry after the 2008 crash, and its target was a perceived conflict of interest at the largest investment banks. The collateral damage landed on the smallest companies on the market, and most retail investors never noticed it happen.

Reviewed by Priya Nair, Editorial Director · May 16, 2026, 21:55

In this article

The Short Version

MiFID II forced asset managers to pay separately for investment research from 2018. The aim was transparency at the top of the market.
The casualty was UK small-cap research coverage, because most funds decided notes on £40 million AIM companies were not worth paying for.
The FCA reversed the unbundling rule in August 2024. The EU followed under the Listing Act, with joint payments allowed again from 6 June 2026.
Reversing the rule does not rebuild analyst desks overnight. The gap in UK small-cap research will take years to recover and may not fully come back.
For retail investors, doing your own work on small-caps is now the only sensible response. The information edge an institution used to have has narrowed.

What MiFID II actually changed for UK small-cap research

The rule in question came into force in January 2018. It required asset managers to pay for investment research separately from trade execution. Before that, brokers had been free to bundle the cost of their analyst reports into the commission a fund manager paid to trade a stock. The fund manager got the research for nothing visible. The broker recouped the cost of the analyst from trading flow. Nobody itemised the price of a thirty-page note on a small mining company because nobody had to.

MiFID II ended that. Regulators in Brussels argued, with reasonable cause, that bundling created perverse incentives. A broker could push trades the asset manager did not need in order to subsidise research the asset manager might not have paid for if asked to write a cheque. Forcing the two activities apart was supposed to bring transparency to a market that needed it. The principle made sense at the top of the market. At the bottom, the rule started a long, quiet contraction in UK small-cap research.

The unintended consequence: a shrinking analyst desk

What happened next is one of the more honest case studies in unintended consequences. Once research had to carry its own price tag, asset managers asked a simple question. Was the report on a £40 million AIM company worth the explicit fee they would now have to pay for it? In most cases the answer was no.

Funds had limited research budgets and they spent them on the names that drove most of their performance, which meant the FTSE 100 and the larger end of the FTSE 250. The brokers, watching their research revenue collapse, drew the obvious conclusion and cut the analysts who covered the smaller end of the market. The Liberum, Numis and Peel Hunt research desks shrank. Coverage of AIM stocks, already patchy, thinned to a level the market had not seen for a generation. Coverage of the smaller end of the market effectively became a luxury good, paid for by issuers or not produced at all.

What thin coverage does to small-cap prices

The effect on price discovery was not subtle. A small-cap with no analyst covering it is a company most institutions cannot buy, because their internal compliance rules require independent research before a position can be taken. A small-cap with no institutional bid is a company whose share price is set entirely by retail flow and the company’s own press releases.

That is a recipe for volatility, for episodes of irrational pricing on both sides, and for the slow drift of capital away from the asset class altogether. UK IPO activity at the smaller end of the market dried up. AIM lost listings every year. Bright founders with growing businesses started to think harder about whether London was the right place to come public. The absence of UK small-cap research was both a symptom and a cause of a wider problem.

How the FCA reversed the unbundling rule

The FCA, watching this play out, ordered a review. The Investment Research Review led by Rachel Kent reported in 2023 and confirmed what anyone working in the space already knew. UK small-cap research coverage had deteriorated. Smaller companies bore the brunt. The unbundling rule was a contributing cause.

The FCA acted on the recommendations the following year. Policy Statement PS24/9 was published on 26 July 2024 and the new rules came into force on 1 August 2024. Asset managers in the UK could now choose, with appropriate disclosures, to pay for research and execution jointly again. The optionality was extended to fund managers in 2025 under PS25/4. The unbundling experiment, on the UK side at least, was over.

The EU follows, and the threshold disappears

The European Union has followed, more slowly. The Listing Act, which entered into force on 4 December 2024, amends MiFID II to allow joint payments once more. The application date is 6 June 2026, which means by the time you are reading this the new rules are either already in operation or weeks away from it.

Brussels has gone further than the FCA in one respect. The previous market capitalisation threshold that limited unbundled research to companies under €1 billion has been removed, so the new bundled regime applies to issuers of any size. The EU has reached the same conclusion as the UK. Forcing research to be paid for separately did not improve the market for smaller companies, it impoverished it. Whether the change actually rebuilds UK small-cap research coverage is a different question.

Why the damage is not reversible overnight

The question for an investor in May 2026 is not whether the rule was wrong. That argument is settled. The question is whether the damage is reversible, and on what timescale. Research analysts who were made redundant in 2018 do not reappear automatically when the rule changes in 2024. Broker desks that closed do not rebuild overnight.

Asset managers who lost the habit of looking at the smaller end of the market need a reason to look again, and that reason is usually performance. The pipeline of new coverage will take years to recover, and some of it may never come back. The smallest listed companies in the UK are still, in early 2026, less covered than they were before MiFID II. The gap in UK small-cap research is structural, not just cyclical.

A worked example: reading an AIM stock today

Imagine you are looking at a UK AIM company with a market capitalisation of £35 million. You search for sell-side notes and find one piece of research, dated eighteen months ago, written by an analyst at a small broker. There is no follow-up. There is no consensus forecast. The Bloomberg page shows a single set of estimates from a paid analyst commissioned by the company itself.

That is the typical shape of UK small-cap research in the post-MiFID II era. Treat the paid note as a starting point, not as independent analysis. Read it for the company’s own framing, then cross-check the numbers against the most recent annual report, the most recent RNS announcements, and any peer-comparison data you can build from public filings. The work the analyst used to do for you is now your job. It is not impossible, but it is more time-consuming, and the people who do it carefully tend to find more mispriced situations than those who do not.

What This Means For You

If you are looking at a company on AIM with a market capitalisation under £50 million, the chances of finding a current sell-side note on it remain low. Where notes exist they are often paid for by the company itself, through a Nomad or corporate broker arrangement. Paid research is not worthless but it is not independent, and you should read it the way you would read a glossy brochure produced by the company’s PR firm.

You are not reading less analysis because there is less to say. You are reading less analysis because nobody is being paid to write it. The information asymmetry between insiders, institutions and retail investors is wider in small-caps than anywhere else in the equity market, and the unbundling era made it wider still. UK small-cap research is rebuilding, but slowly, and the retail investor who learns to do the work themselves is no longer at the disadvantage they used to be.

In Plain English

MiFID II is the rule that quietly killed UK small-cap research between 2018 and 2024. Asset managers had to pay separately for analyst notes, decided most small-cap notes were not worth paying for, and the broker desks shrank to match. The FCA and EU have both reversed the rule, but rebuilding the analyst base is a slow job. For now, the retail investor doing their own work on AIM is operating in a market that is less informed than it used to be, which is both a risk and an opportunity.