When the government asked one of the city’s top financial services lawyers to undertake a review into the state of investment research in the UK it was always likely that the results would be worth a moment of your time.
With the launch of Rachel Kent’s Review at Mansion House last week this has – more than – proven to be the case.
Kent has consulted extensively with market practitioners and makes recommendations designed to improve investment research and ultimately help the UK become an even more attractive venue for new listings.
Why single out investment research?
Kent points out that investment research is the golden thread that runs through the UK capital markets, highlighting the “virtuous circle”, of good research leading to better valuations, which in turn encourages investors, producing greater liquidity and increasing the overall attractiveness of the UK as a place to list.
The UK’s investment research ecosystem has been first-rate, but Kent does a good job of drawing out some of the issues that are seen as currently holding the UK back, such as,
“The de-equitisation of the UK capital markets, whereby institutional investors have channelled funds away from equities and into fixed income during recent decades, leading to a decline in interest in new listings in the UK’s exchanges.”
This has been accompanied by the implementation of “well-meaning regulation [which] has had unintended consequences.”
To remedy this, Kent offers the following recommendations:
- Establish a Research Platform that will provide a central facility for the promotion, sourcing, and dissemination of research – in particular, in relation to smaller companies.
Such a central facility can learn from and develop initiatives undertaken in other financial centres. It should be designed to support the production of research on all publicly traded companies. This should lead to improved research coverage and, ideally therefore, greater market interest in smaller cap companies and liquidity in their shares. Kent makes it clear that adequate and sustained funding must be provided in order for the facility to be able to encourage wider investor interest in participating companies.
- Establish a separate code of conduct for issuer-sponsored research.
- Amend regulations governing how investment research is paid for, to allow clients and their managers greater choice.
By introducing additional optionality in how investment research is paid for, Kent argues that current frictions over investments charges would be removed, and the UK would remain aligned with other key jurisdictions (in particular the US and EU). Currently this is a competitive disadvantage.
- Remove any barriers that prevent UK buy-side firms from paying for investment research in other jurisdictions where payment on a bundled basis is standard practice in that jurisdiction.
- Review the current complex and difficult to navigate regulatory regime related to investment research, to make it more streamlined and efficient.
As the Review states, “A bespoke regime for the provision of investment research would be ideal. Retail investors represent a material element of liquidity, especially in the smaller cap market, but there is an asymmetry in the research available to retail and institutional investors.”
- Review the regulations relating to access good quality investment research to facilitate the provision of research to retail investors.
Kent makes the point that, at present, without access to the same research as institutional investors, too many retail investors rely on information sources such as chat rooms.
- Harness the knowledge and experience within our universities to assist in the provision of research on innovative companies and sectors and to help train the next generation of research analysts.
Reflecting on the potential benefits, Kent neatly summarises it thus:
“The evidence has convinced me that increased provision of investment research, particularly to fill the gap on smaller cap companies, will help create a much stronger capital markets ecosystem, a stronger and more resilient UK economy, and more jobs across our four nations.”
How has the review been received?
Across the industry, generally positive with a distinct sense that it may well have greater impact in the medium to longer term. And from the government? Well, if you were only to get one paragraph in the Chancellor’s Mansion House speech, you’d be more than satisfied with this:
“The government welcomes Rachel Kent’s excellent Investment Research Review published today and has accepted all recommendations made to it. We therefore welcome the FCA’s commitment to start immediate engagement with the market to inform any rule changes on removing the requirement to unbundle research costs by the first half of next year. This will ensure we are better able to fund quality research into the new Silicon Valley sectors.”
It is an excellent review. Very good, collaborative work, completed in short order with the potential for extremely positive results, not least in the longer term.