On 10 July 2023, HM Treasury published the outcome of the Independent Research Review, which was announced on 9 December 2022 as part of the Edinburgh Reforms and launched on 9 March 2023. The purpose of the review was to consider levels of financial services investment research in the UK and its contribution to UK capital markets competitiveness, as part of the government’s broader work to increase the attractiveness of the UK as a location for large and small companies to raise capital.

Key recommendations

The outcome report sets out a series of recommendations to the government, the Financial Conduct Authority (FCA) and industry. The key recommendations are to:

• Introduce a Research Platform to help generate research: The proposed ‘Research Platform’ would 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 companies. It should be designed to support the production of research on all publicly traded companies, with the aim of improving research coverage and, ideally, greater market interest in smaller cap companies and liquidity in their shares. Separately, there should also be a code of conduct for issuer-sponsored research.

The report envisages that the Research Platform would be implemented in the medium term.

• Allow additional optionality for paying for investment research: More flexibility should be built into the rules to give buy-side firms the option of being able to pay for research (i) out of their own resources, (ii) by making a specific charge directly to their clients in respect of the costs of research, or (iii) by combining the cost of research with execution charges. Greater optionality is intended to remove current frictions over investment research charges, and to ensure the UK remains aligned with other key jurisdictions (in particular the US and EU) and not be at a competitive disadvantage. In any event, any barriers that prevent UK buy-side firms from paying for investment research in other jurisdictions where payment on a bundled basis is standard practice in that jurisdiction should be removed.

This reform is intended to be implemented by the FCA as soon as practicable (subject to consultation).

• Allow greater access to investment research for retail investors: The FCA should consider how the regulatory regime may prohibit or discourage access by retail investors to investment research prepared by authorised persons, where the research provider wants to make the investment research widely available. It should also consider whether rules could be amended or guidance offered to allow retail investors to access investment research more easily.

The report notes that ideally, the FCA would carry out this review as soon as practicable (taking account of its current workloads and priorities) as it would facilitate other aspects of the recommendations (particularly the Research Platform). However, the Research Platform would not be contingent upon the questions that the FCA would be considering, and the question of access for retail investors is something that should be addressed regardless of the development of the Research Platform.

• Involve academic institutions and bursaries in supporting investment research initiatives: As part of the process of establishing the Research Platform, the operator of the Research Platform should consider exploring mechanisms to strengthen the collaboration between academic institutions and the capital markets ecosystem, including in relation to (i) the provision or support of research, (ii) providing training for analysts, and (iii) encouraging academic institutions to assist innovative enterprises that seek to develop out of academic study. The potential shortfall in the number of analysts could also be addressed by creating bursaries to assist academic institutions with the cost of training new analysts.

Implementation of this recommendation would be to the same timescales as the Research Platform, with the operator of the Platform administering and overseeing the collaboration and the bursaries.

• Supporting issuer-sponsored research by implementing a code of conduct: The industry should collaborate to support the creation and adoption of a voluntary code of conduct for all issuer-sponsored research, to add structure to the issuer-sponsored research market and enhance the integrity of issuer-sponsored research as a potential useful source of information in its own right. The report suggests that although the code might be industry-led, the FCA could consider recognising the code.

The report suggests that one of the relevant trade bodies could provide this, and that it should be created and adopted in the short-term.

• Clarify aspects of the UK regulatory regime for investment research and consider introducing a bespoke regime: The current regulatory regime related to investment research should be reviewed and steps taken to identify any areas that are unclear, unnecessarily complex or difficult to justify. The regime should be simplified and/or clarified where appropriate, and it may be appropriate to have a bespoke regime relating specifically to investment research.

The report states that the FCA and (if the FCA’s review identifies that changes are needed to the regulatory perimeter) HM Treasury should implement this recommendation as soon as practicable, noting that any changes to the rules would be subject to consultation.

• Review the rules relating to investment research in the context of initial public offerings (IPOs): The IPO timetabling changes introduced in 2018 should be reviewed to consider if amendments could be made to simplify the IPO timetable, while continuing to ensure adequate and timely access to information. The FCA should consider whether connected analyst research produced in connection with an IPO could be made available on a similar basis to the company’s prospectus, so that all investors can access the same information. In addition, the limitation on connected analysts being allowed to meet with potential IPO candidates before an investment bank is mandated on an IPO transaction contained in the FCA rules should be reconsidered.

This recommendation is intended to be implemented by the FCA in conjunction with its existing work on implementing the recommendations of the Listing Review and Secondary Capital Raising Review. Any changes to the rules would be subject to consultation.

FCA response

The FCA has published a statement welcoming the report and confirming that it will carefully consider the recommendations. It plans to start engaging immediately with market participants, which will inform the content of any consultation proposals, and subject to that feedback the FCA will consult on an accelerated timetable on potential regulatory changes that could introduce more options on how to pay for investment research. It also intends to take feedback from the market on the timing of any rule changes and, subject to this detailed consultation feedback and FCA Board approval, will aim to make relevant rules in H1 2024.