Beyond the FCA decision: the value of independence
On Friday, the FCA released its position paper on payment optionality for research. (ps24-9.pdf (fca.org.uk))
As was widely expected, the FCA, acknowledging the crucial role of investment research for market integrity, now authorizes asset managers in the UK to use client funds to pay for research through a Commission Sharing Agreement. While this was already possible through RPA under MIfid 2, the operational complexity of a CSA is less than that of an RPA and one can expect that the take-up of such an option will increase.
The regulation also clarifies (and to some extent simplifies) the level of disclosure that will be required from asset managers when it comes to research (policy, methodology of assessment, periodic review of providers and the budget of research…).
Among noticeable changes, the FCA no longer requires the disclosure of the most significant research providers but has replaced this with a requirement to disclose a breakdown by type of providers, and notably a breakdown of what is paid to Independent Research providers (IRPs) and non-IRPs.
What is independent research and what isn’t?
All research houses pride themselves in having analysts who are independent and therefore consider that their research is independent.
We obviously have a different view on the matter. In our opinion, independent research is all about conflict of interest and where the payment originates. Is the research provider paid by the asset manager / asset owner or is it paid by the issuer through ECM, DCM, corporate services, banking activities...
The less the buy side paid for research, the more equity research has been driven by cross subsidization with corporates footing the bill.
Back in March 22, the FCA exempted from research dissemination restriction equity research from firms that were not a subsidiary of an investment bank or had any execution services.
As a rule of thumb, if your broker/ research provider has a strong investment banking division or offers corporate services (roadshows, corporate brokerage, financing…), it should be deemed non-independent.
Benefits of independent research
Investment banking/ brokers’ research is most of the time of high quality, but independent equity research brings two key benefits that brokers just cannot provide: absence of buyer bias and continuity of research.
Because they don’t need to cuddle up to issuers in order to preserve the bank’s relationship for the next M&A or refinancing deal, independent analysts can truly express their view, be that on valuation, governance or strategy. Believe it or not, this translates into far more negative ratings for independent research than for the traditional sell-side.
In all, we very much welcome the decision by the FCA to provide a CSA-like option in order to boost investment research and enhance market integrity. And we believe the transparency between research paid to potentially conflicted research and independent research is very much needed.
We hope that ESMA and the NCAs (and AMF in the first place) will soon take similar decisions to create an environment where investment research and especially independent investment research can thrive.
As was widely expected, the FCA, acknowledging the crucial role of investment research for market integrity, now authorizes asset managers in the UK to use client funds to pay for research through a Commission Sharing Agreement. While this was already possible through RPA under MIfid 2, the operational complexity of a CSA is less than that of an RPA and one can expect that the take-up of such an option will increase.
The regulation also clarifies (and to some extent simplifies) the level of disclosure that will be required from asset managers when it comes to research (policy, methodology of assessment, periodic review of providers and the budget of research…).
Among noticeable changes, the FCA no longer requires the disclosure of the most significant research providers but has replaced this with a requirement to disclose a breakdown by type of providers, and notably a breakdown of what is paid to Independent Research providers (IRPs) and non-IRPs.
What is independent research and what isn’t?
All research houses pride themselves in having analysts who are independent and therefore consider that their research is independent.
We obviously have a different view on the matter. In our opinion, independent research is all about conflict of interest and where the payment originates. Is the research provider paid by the asset manager / asset owner or is it paid by the issuer through ECM, DCM, corporate services, banking activities...
The less the buy side paid for research, the more equity research has been driven by cross subsidization with corporates footing the bill.
Back in March 22, the FCA exempted from research dissemination restriction equity research from firms that were not a subsidiary of an investment bank or had any execution services.
As a rule of thumb, if your broker/ research provider has a strong investment banking division or offers corporate services (roadshows, corporate brokerage, financing…), it should be deemed non-independent.
Benefits of independent research
Investment banking/ brokers’ research is most of the time of high quality, but independent equity research brings two key benefits that brokers just cannot provide: absence of buyer bias and continuity of research.
Because they don’t need to cuddle up to issuers in order to preserve the bank’s relationship for the next M&A or refinancing deal, independent analysts can truly express their view, be that on valuation, governance or strategy. Believe it or not, this translates into far more negative ratings for independent research than for the traditional sell-side.
In all, we very much welcome the decision by the FCA to provide a CSA-like option in order to boost investment research and enhance market integrity. And we believe the transparency between research paid to potentially conflicted research and independent research is very much needed.
We hope that ESMA and the NCAs (and AMF in the first place) will soon take similar decisions to create an environment where investment research and especially independent investment research can thrive.
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