FSA clarifies research standards issues

The UK Financial Services Authority (FSA) has issued new and wide-ranging guidelines for investment banks related to their publication of research in new issues of securities.

Though FSA chairman Howard Davies said “London has been spared the worst of the abusive practices” that have plagued the Wall Street community in recent months, he nevertheless conceded that “we have found evidence of systematic bias in analyst recommendations, and of bad management of conflicts of interest”.The new FSA directive, issued in the form of a consultation document, follows the spirit, if not the letter, of recent changes in the US. While keeping the burden on “principles" and "senior management responsibility” it seeks to enhance transparency and outlaw the worst abuses of trust.

The goal of the FSA’s new proposals is to provide a clearer regulatory line on standards of conduct within the current framework of rules. This is achieved by instituting specific guidelines about the systems and controls that banks need to have in place to ensure they do not improperly influence the content of research reports. These include removing analysts altogether from the client-pitching and marketing processes and avoiding reward structures that encourage judgement to be compromised.

Other measures include the advent of a historical price chart showing price movements against recommendations, the introduction of a quiet period for new securities issues, and any share allocation to be controlled by senior finance personnel who are independent of the process of servicing investment clients.