FCA Consultation Paper

The fairest, most informative deal for investors in post-Brexit IPOs. That’s what the FCA wants us to think

The FCA consultation paper regarding research written pre-IPO will improve Britain’s perception as a competitive global listing hub

The FCA – the City regulator – yesterday published its long awaited Consultation Paper outlining sweeping reforms as to how information should be disseminated, and indeed who it should be written by, during the IPO process in the UK. Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said: “The proposals we have outlined in today’s Consultation Paper are designed to improve the range, and timeliness of higher quality information that is available to investors during the [IPO] process.”

The major focus is on the quality of pre-IPO information available to investors. The FCA is pushing for ‘unconnected’ analysts as well as ‘connected’ analysts to have access to company management, as the connected analysts’ corporate broking team “place significant pressure on analysts to produce favourable research coverage if their bank is to secure a place on the syndicate”, the FCA has found. The presence of the ‘unconnected’ analyst should, in theory, ensure more honest research is published to a wider range of investors before the IPO.

Both Nils Pratley (The Guardian) and the FT’s Lex column have commented on the length of time it has taken the FCA to realise the obvious: that The UK IPO system is “riddled with obfuscation and conflicts of interest” (Nils Pratley). In France a prospectus for an IPO is available six weeks before listing, and in the USA it is available long before the day shares start trading.

The FT comments that “in theory, company listings are about price discovery. In practice, UK IPOs are about price fixing.” This cynical view overstates the case. Company listings in the UK are about price settling and understanding, and if the investment community has any faith in the intelligence of its research analyst network (which is a separate debate), it should trust the valuation put forward as a useful starting point upon which further analysis should be undertaken. Nobody thinks that the ‘marketing research’ published by a book running bank – one which is selling the stock to investors –  is independent and unbiased. However, the concept that an ‘unconnected’ analyst would write anything without an ulterior motive of gaining trading commission, is delusional. Analysts don’t produce research for the betterment of others, but to improve the profit margins of their business through trading commission.

These changes will certainly be welcomed by investors who will have access to more information upon which they can judge the value of a company. The information may not be better information, but there will be more of it. The FCA is determined to demonstrate that the UK is very much “open for business” post-Brexit and this move ensures that the market will remain competitive, at least in perception. However, this increased level of transparency doesn’t come without other drawbacks: in what can already be a lengthy process, this could further elongate proceedings which could ultimately increase the risk of a failed listing. It could also make funds harder to raise in a short period of time, as investment analysts pore over vast quantities of information, trying to separate the news from the fake news, before committing to a stock.

One other (slightly ugly) question that rears its head is who will pay for the unconnected research, and why would an ‘unconnected’ research analyst want to produce it, if not for future business prospects? ‘Connected’ analysts provide a vital function in promoting the investment case, disseminating it to chosen investors in order that a successful and fully underwritten IPO can occur. If you believe the FCA, ‘unconnected’ analysts have no ulterior motive to produce research, other than for the interest of the investors. However, in reality, if his/her shop gets no trading out of it, then the work has been done for nothing. As an ex-analyst, I can vouch for how much work goes into these pieces of research, and few would willingly do it for free! Clearly no research will be provided, free of charge, and free of bias.

However, in a financial environment dominated by uncertainty, and as other global markets tout for new listing opportunities, the UK must cement its position as one of the most attractive places to bring a company to market. This week’s move by the FCA superficially does just that as well as attempting to reduce the influence a particular ‘connected’ research analyst may have when promoting the investment case to investors. For the integrity of the markets, this appears a triumph. Let’s see whether it really has an impact.

This article was written by James Ash, Consultant at Newgate Communications


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