Analyze This

The FCA wants more independent research on IPOs. That will be hard

The U.K.'s financial regulator wants more independent research on companies that are preparing to go public. Few would disagree with that goal. The problem is how to achieve it.

The Financial Conduct Authority said it looked at 169 U.K. initial public offerings from January 2010 to May 2015 and found only a single example where research was available from a bank that wasn't connected with the transaction.

Here's why the FCA says that's a problem:

Arguably, this research has the potential to be at heightened risk of bias due to potential pressure on connected analysts to produce favorable research. Inadequate or biased analysis could lead to inefficiency in the price formation process or inappropriate investment decisions.

Pause for a moment, and digest the tacit acknowledgement from the U.K.'s top financial watchdog that bank analyst research isn't to be trusted. And then, because everyone presumably understands this to be the case, let's move on to what can be done about it.

Lift Off

UK regulators are concerned about the quality of IPO research as the market for listings has surged

Source: Bloomberg

*2016 is year to date

The regulator suggests several solutions, which more or less all amount to variations on a couple of themes.

First, make the prospectus available to potential investors earlier in the process, giving them more time to trawl through it. Second, give analysts at banks that aren't involved in the deal better access to the issuing company's information and management. This would likely require some kind of regulation that forces the issuer and their bankers to disclose more.

Both suggestions seem likely to help. In particular, if investors want independent research, and independent analysts have access to enough information on which to base their work, then the market will take care of the rest. Money managers will pay for the research and analysts will provide it. In theory.

In reality, it's more likely the biggest institutional investors will continue to do their own work, while smaller investors -- especially individual investors -- will have to rely on the stuff that is "inadequate or biased." The only way around that could be to give the independent analysts a bit more of a push -- not only lead them to water, but encourage them to drink, too. That means providing some financial incentive.

How about requiring a set number of independent analysts for each IPO? The exchange could select the analysts, and charge for that work through the listing fees companies pay when they go public.

But again, the problem is that this would push up the cost of a listing and it's still not clear that analysts would rush to join in. Which takes us back at the starting point: the goal of more independent IPO research is a good one, but achieving it won't be easy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Duncan Mavin in London at

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    Edward Evans at

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