Howard Davies, Chairman of the FSA, said: "In London we have been spared the worst of the abusive practices seen on Wall Street. But we have found evidence of systematic bias in analyst recommendations, and of bad management of conflicts of interest.
"The proposals we are publishing today will strengthen the regulatory regime and promote higher standards. They will enhance transparency and outlaw the most blatant abuses of trust.
"They go with the grain of the US changes, but do not replicate them in every detail. We remain convinced that a regime based on principles, and senior management responsibility, is the right approach."
The consultation document explains how the FSA intends to strengthen the regulatory regime to promote higher standards. More specifically, firms are already required to manage their business with integrity and with due skill, care and diligence and to observe proper standards of market conduct. But in response to industry requests, the FSA has provided a clearer regulatory line on acceptable standards of conduct within the current framework of principles and rules.
The key principle in the paper concerning conflicts of interest in investment research is that regulated firms should have systems and controls in place to ensure their own interests do not improperly influence the content of research reports. For example:
- it would be unacceptable for analysts to be involved either in pitches for new investment banking mandates or in the active marketing of new issues; and
- firms should avoid reward structures that create direct incentives for analysts to act in ways that would compromise their judgement.
- quiet periods: a quiet period will be introduced for new issues of securities;
- specific disclosures such as a clear and unambiguous explanation of any ratings or recommendations; and
- a three year historical chart showing price movements against recommendations.
- firms should provide the issuer with relevant information about the proposed allocation policy for the issue before accepting a mandate;
- allocation should be controlled by the senior finance personnel, and not by staff servicing investment clients; and
- any allocation to a private client who is a senior executive of a listed company (or potential or existing investment banking customer) should be confirmed by the audit committee of the company.
The consultation period ends on 12 May 2003.
Background
- CP171 can be found on the FSA website www.fsa.gov.uk/pubs/.
- The FSA published DP15 in July 2002 examining the ability of the current regime to regulate conflicts of interest.
- Changes to regulation at EU level will need also to be taken into account when implementing the proposals. In particular forthcoming proposals from the Committee on European Securities Regulators (CESR) will cover fair presentation of investment research within the context of the Market Abuse Directive. The Investment Services Directive also contains high level requirements on managing conflicts of interest. Our proposals in this paper are consistent with these EU initiatives.
- The term 'laddering' is taken to mean where the investment bank makes profits from investors through charging higher fees and commissions on unrelated deals.
- The term 'spinning' is taken to mean where the investment bank provides shares in the new issue to individuals of key client firms knowing that they will do well. This acts as a reward for those individuals who in return will place business with the investment bank. This also provides an incentive to underprice an issue.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000 : maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
