FCA Markets Practitioner Panel (MPP) and Listing Authority Advisory Panel (LAAP) formal response to Call for Evidence UK Investment Research Review [pdf]

The Listing Authority Advisory Panel (LAAP) and the Markets Practitioner Panel (MPP) of the Financial Conduct Authority (FCA) have published a joint response to the government’s call for evidence on the status quo of investment research in the UK and ways to improve investment research coverage in the country.
To recall, in April 2023, the HM Treasury launched a call for evidence to collect information from various stakeholders, including issuers, investors, portfolio managers, trading venues, or legal councils, on a number of questions relating to this status quo. The questions thereby addressed the international comparability of the UK investment research market, the importance of the research market particularly in view of the attractiveness of the UK capital market for listing, the impact of the MiFID II unbundling rules on the provision of research, or factors that could improve the provision of research on small(er) cap issuers. For more information, please see EventID 20589.
In their response, the two panels acknowledge that the decline in research coverage is a significant concern. Particularly midcap and small-cap issuers have been impacted by this trend, along with issuers in growth sectors like technology. According to the LAAP and the MPP, the reasons for the decline in investment research are manifold: Research divisions within major banks often operate(d) at a loss, resulting in coverage being limited to highly liquid stocks or those with associated corporate finance relationships. Moreover, the merging of UK-focused research desks with their EU counterparts has adversely affected UK midcap stocks. Cost considerations have also led to a lack of senior analysts and forced analysts to cover a wider array of companies, compromising the quality of individual company research. The introduction of MiFID II unbundling rules has further exacerbated this situation, causing a substantial decrease in research payments since January 2018, disproportionately impacting European brokers in comparison to their US counterparts.
But – although investment research plays a critical role in the functioning of capital markets by aiding investors in comprehending the growth potential of issuers and determining issuer and stock valuation, which in turn impacts price formation during initial public offerings (IPOs) and secondary trading – it is crucial to recognize that enhancing research provision alone will not suffice to address the broader challenges that have led to the decline of the UK’s capital market. In fact, a holistic approach is required, encompassing regulatory reforms in various areas, such as reforms in the listing rules. Research rules themselves may impact the level of research being performed, but are not solely responsible for the decline in investment research and the decline of UK listings.
Moreover, reverting back to non-MiFID rules will not remedy the current situation, particularly as MiFID II brought about increased transparency which was highly welcome by international investors. In addition, other (international) regulations also influence research provision and the alignment with international standards is imperative to ensure the success of UK investment research coverage and listing.
To revitalize research coverage in the UK capital markets, the panels suggests that various options and opportunities be explored. These include, for instance, enhanced cooperation with leading academics or the permission of sponsored research, with stringent safeguards for independence. Moreover, exemptions to unbundling regulations for certain market capitalization levels or high-growth industries should be considered to ensure parity with EU proposals. Finally, the LAAP and MPP also suggest to consider the monitoring of access payments for research by the Financial Conduct Authority.