The link between increased generation of investment research and the competitiveness of the UK's capital markets is widely accepted - this was the context of the Government's Investment Research Review last year. The FCA's recent proposals are a positive step in this context.
However, when assessing the FCA's proposals more closely, the devil is in the detail - are these proposals as impactful as they appear on the surface? There are a number of conditions attached to the rule changes, which it seems to me may complicate matters.
Accordingly, there are three key points to be made:
- The new rules include the concept of 'equality between clients' - it is difficult to know what this means practically. Historically, larger clients have often benefited more from research, and bundled brokerage and research fees have arguably been skewed in their favour. It is therefore difficult to assess how this requirement will play out in real terms.
- The rules also include the concept of an annual, aggregated level of research fees. This begs a familiar question posed by the original unbundling rules: how do you value research? Historically, research has been perceived as somewhat of a 'free good', yet this will no longer be the case.
- The third point relates to the allocation of payments between research providers, as the FCA's proposals seem to suggest an intention to prevent brokerage from skewing the choice of research provider.
These points are particularly valid when considering the original policy concerns around conflicts of interest and the overconsumption of research, which accompanied the unbundling requirements in the first place.
Therefore, two questions emerge:
- Are these requirements so onerous that there will be no discernible increase in research, particularly for less liquid stocks?
- Will the UK remain an outlier, given other jurisdictions are not adopting the same approach?
As developments unfold in the EU and US, the latter question will become clearer.
Overall, while it is possible that the FCA is trying to liberalise and comply with the Investment Research Review, the level of detail in the requirements makes one wonder whether this is really where we will end up.
...when assessing the FCA's proposals more closely, the devil is in the detail - are these proposals as impactful as they appear on the surface?
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