The Financial Conduct Authority is keen to abolish some of the most onerous EU rules on investment research, offering a potential lifeline for small UK businesses that have little or no analyst coverage.
The UK regulator released a consultation paper on April 28 in which it proposed to drop investment research rules for companies with market capitalizations below £ 200million to “reflect and address potential failures of the market. market in the form of low levels of research coverage ”.
Under the proposed changes, research on these businesses that is provided on a reorganized or free basis would constitute “an acceptable minor non-monetary benefit” and would not constitute an inducement.
The proposed changes come after the implementation of the Second European Directive on Markets in Financial Instruments in January 2018, resulting in significant changes in the way investment research is used by asset managers.
Asset managers’ research budgets have been slashed after the majority were forced to bear the cost of investment research, after rules precluded continuing to receive such information from brokerage firms in exchange for commissions negotiation.
As a result, research brokers have significantly reduced their analyst teams and dedicated coverage to larger companies.
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“Looking at where there is no coverage by research analysts, and therefore where we should steer our policy proposals, it is indeed the small cap companies that are not covered,” the FCA said in its consultation document.
The FCA said that of 547 companies surveyed that do not have research analyst coverage, around 98% have a market cap of less than £ 250million.
“Comparing these figures to the larger population of companies, this means that around 28% of all listed companies in the UK do not have research analyst coverage,” the FCA said.
Asset managers have called for an overhaul of how Mifid II is applied in the UK after the country left the EU last year.
Daniel Pinto, chief executive of wealth management firm Stanhope Capital, told Financial News last month that research departments focused on small-cap stocks had been “wiped out” in the wake of Mifid II.
“No one wanted to pay for research on SME stocks,” Pinto told FN.
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“The collateral damage is enormous. SMEs trying to raise funds today do not have enough research and institutional investors who might have been interested in supporting them are not interested. “
Daniel Carpenter, head of regulation at regtech firm Meritsoft, said the FCA’s proposals showed the rules were starting to change for search providers just four months after the UK’s divorce from the EU.
“These proposed changes illustrate the inevitable complexities that arise whenever there is a growing divergence of rules between different jurisdictions,” he said.
“Companies will need to find a way to manage several EU research agreements, in addition to the UK-specific small-cap agreements. It all boils down to one thing: a mountain of additional complexity when it comes to structuring and billing research fees and contracts. “
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