Howard Davies, chairman of the FSA said: "Our analysis shows that the UK market is different from the US market in a number of ways. In particular there are fewer individuals who invest directly in the UK and might therefore respond to analysts' recommendations and there is far less emphasis here on "star analysts". We also have not had any specific examples of bias and corrupted advice.
"On the other hand, the market here is dominated by the same firms who operate in the US market. And there is some evidence both that analysts' recommendations have been systematically more positive than market performance would justify and, more seriously, that analysts' recommendations in relation to companies with which their parent house has a relationship are systematically more positive than the average. The proportion of 'buy' recommendations made by firms acting as corporate brokers/advisors to the subject company is, at 80%, almost twice as high as the proportion of 'buys' where the analyst does not work for the corporate broker. It is difficult to see how the differential in "buy" recommendations can be justified on any objective grounds.
"The differences between the UK and US markets mean that whilst US-style disclosure requirements coupled with mandatory qualifications for analysts might be one way of dealing with a perceived problem, letting the market find its own solutions, improving consumer education or even completely changing the approach to research are also worth considering. The Discussion Paper on which we are especially interested in comment from investors, both institutional and individual, canvasses all the viable options."
Examples of market-based solutions in the UK include moves by some investment houses to address the imbalance of "buy" and "hold" recommendations. If the FSA were to set disclosure requirements these could include requirements to explain the meanings of the ratings and give the percentage of buy/hold/sell ratings. Research reports could also include more detailed disclosures on any relationship an investment house has which may affect the conclusions of report.
The FSA will use the responses to this paper to assess need for change in the UK. Feedback will also support the FSA's contributions to the work of the Committee of European Securities Regulators (CESR) on the proposed directive on Market Abuse and to similar work by the International Organisation of Securities Commissions (IOSCO).
Comments should reach the FSA by 30 October 2002.
