A new report on European independent research argues that management access does not meet the European definition of research and should not be payable through commissions. The report also suggests that the U.S. insider trading investigations may lead to greater regulatory scrutiny of corporate access.
The report was commissioned by EuroIRP, the trade association of European independent research providers, and the Centre for the Study of Financial Innovation. The report – Has Independent Research Come of Age? – was authored by Vince Heaney, a former editor of the Lex column in the Financial Times and can be accessed on the EuroIRP website.
One recommendation made by the report is to lobby regulators for the exclusion of corporate access as a commissionable expense. Since corporate access lacks ‘original content’, it falls outside the definition of research in regulation designed to unbundle payments for research from trading fees.
Heaney met with the Financial Services Authority (FSA), which indicated that, depending on its definition, corporate access might not be a legitimate use of dealing commissions. On the question of whether the issue warranted further regulatory attention, the FSA drew attention to its successor body, the Financial Conduct Authority (FCA). The mandate of the FCA will be to supervise consumer protection and markets, including an increased focus on wholesale conduct.
The report stresses that the FSA did not provide a definitive answer on the topic, but interprets the regulatory response as holding out the prospect that corporate access could be deemed an ineligible use of dealing commissions. It also raises the possibility that the insider trading investigations in the U.S. will lead to greater oversight of management access: “It is also probable that the issue of corporate access will be examined if there is increased regulatory scrutiny of expert networks in the wake of the US insider trading scandals.”
The report draws a comparison between expert networks and corporate access, particularly for meetings with management of smaller companies or businesses in niche markets. “’In these circumstances the broker is adding value,’ says one [asset manager]. ‘It’s no different to using an expert network. You hear far more complaints about using commission payments for access through brokers than you do about expert networks.’”
Unlike the U.S., corporate access in Europe is tightly controlled by the largest investment banks, with little competition from smaller brokers or independents. The report suggests that if management access were not paid for by commissions, then the playing field would be more level for independent providers.