A welcome freedom, temporary measure or futile task?: The industry reacts to the UK’s new research proposal

Following last’s night Mansion House address, industry experts provide insights into the latest research developments to improve the attractiveness of UK markets.

To help boost the attractiveness of the UK’s financial services sector, the UK government revealed last night that it had accepted all recommendations from Rachel Kent’s UK Investment Research Review, published yesterday.

In last night’s Mansion House address, Jeremy Hunt, Chancellor of the Exchequer, said: “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.”

The Financial Conduct Authority (FCA) has said it will “carefully consider” the new proposals, working closely with the Treasury – with rule changes expected to be made as early as the first half of next year, subject to FCA board approval.

Read more: FCA eyes first half of 2024 for revisions to UK research rules after Mansion House announcement

In Kent’s review, she highlighted that investment research is a crucial element of an effective and attractive public capital market, alongside emphasising that more, and better, research can lead to better pricing for all companies while also attracting a broad range of investors, which in turn could lead to greater liquidity for the UK’s economy.

“Rachel Kent’s review focuses on removing enough of the operational burdens to encourage asset managers to take advantage of new rebundling freedoms, but not so much that transparency to asset owners is completely jettisoned. The FCA now has the task of preserving this sensitive balance in the detailed rules that come out next year,” Mike Carrodus, chief executive of Substantive Research, told The TRADE.

“Asset owners will have to buy into the message that taking on these costs will benefit the investment processes of their asset managers, and by extension the money that they are investing with them. In the current market and economic climate most asset managers aren’t keen to try out that message in the short-term, but it’s definitely possible that the situation could evolve as we move through the cycle.”

The review consists of seven recommendations including the introduction of a Research Platform, which will provide a central facility for the promotion, sourcing and dissemination of research on publicly traded companies – potentially open to all, but in particular, for smaller cap companies.

“The call for a research platform is a clear indication that the market is struggling to match supply and demand effectively, despite overwhelming demand. We consider this proposed platform as a valuable temporary measure, an approach that has seen success in similar schemes by Deutsche Börse Scale and the Tel Aviv exchange. These initiatives served as catalysts until their sell-side ecosystem matured and took over,” said Neil Shah, director of research at Edison Group.

“While some respondents to Rachel Kent’s review believe that restoring the sell-side research industry may be a futile task — viewing it as a ‘bolted horse’ — our experience with comparable initiatives in other countries bolsters our optimism. We see this proposal as a progressive step, with its success dependent on securing appropriate funding.” 

The review also recommends allowing additional optionality for paying for investment research, ensuring there is greater access to investment research for retail investors, as well as involving academic institutions in supporting investment research initiatives.

Elsewhere, Kent recommended that issuer-sponsored research should be supported by implementing a code of conduct; aspects of the UK regulatory regime for investment research should be clarified while also considering introducing a bespoke regime; and that the government should review the rules relating to investment research in the context of IPOs.

“Alongside the tsunami of regulatory changes at the time, research unbundling and the need to adopt one-size fits all rules across complex financial operations was a heavy lift for the industry […] It took considerable industry effort to build consensus on the workflows for the processing of research payments either as part of fund level allocation and settlement, or on order placement,” Anne Plested MCSI, senior product manager for regulation at ION Markets, told The TRADE.

“With the UK’s drive to improve capital markets and encourage greater investment, the UK Research Investment Review takes a second look at the current complex and difficult to navigate regulatory regime to make it more streamlined and efficient.”