Policy paper

Terms of Reference – Investment Research Review

Updated 11 July 2023

This was published under the 2022 to 2024 Sunak Conservative government

0.1 Context

The UK is home to one of the largest financial services centres in the world, providing more than £194 billion in value to the UK economy. Deep and liquid capital markets sit at the heart of the UK’s continued prosperity as a financial hub. They enable UK and international businesses to raise funds and manage risks, while also allowing institutional and private investors to access financial instruments, and they provide a direct source of employment and tax revenue.

To take advantage of the UK’s new freedoms in financial services following its withdrawal from the EU, the government has launched several initiatives to strengthen the UK’s capital markets. In particular, the Lord Hill Listing Review made recommendations on how to boost the UK as a destination for IPOs and optimise the capital raising process for large and small companies on UK markets. Similarly, the Wholesale Markets Review (WMR) aims to improve the regulation of secondary markets, proposing wide-ranging reforms to the UK’s capital markets framework.

The government is currently in the process of taking forward these reforms, including through the landmark Financial Services and Markets Bill currently before Parliament. While a lot of progress has been made, the government is aware there is still much to do to ensure the UK continues to be one of the best places for companies to grow, list and trade.

The importance of information available to investors has been a key part of the government’s agenda and was highlighted as a key issue by Lord Hill. The government’s reforms to the prospectus regime, and other Financial Conduct Authority (FCA) changes to listing rules, seek to address this. As part of this, however, the availability and market for investment research has been highlighted as an issue that should also be examined.

Investment research can provide investors with information that can allow them to better understand a company’s business model, performance, and risks, and therefore to assess its value as an investment. It is used by potential investors who are looking to trade in both public and private markets to inform investment decisions. Low levels of investment research can therefore make it harder to value companies, make it more difficult for companies to attract investors, and make UK markets less attractive to businesses that want to raise capital.

The market for investment research for publicly listed companies changed substantially in the UK in 2018, when the rules on the payment for investment research were amended as part of the UK’s implementation of the revised Markets in Financial Instruments Directive. These changes separated payment for investment research from payment for execution services (“unbundling”). The FCA made some revisions to those rules at the start of last year including as they applied to investment research on smaller quoted companies.

Several commentators, including Lord Hill as part of his Review, have suggested that the UK has lower levels of investment research capability in comparison to other jurisdictions, in particular the US, and that this problem is particularly acute for certain sectors, such as for tech and life sciences companies. Some commentators believe that the unbundling rules may be contributing to these lower levels of research.

The Government has therefore launched an independent review of investment research and its contribution to the competitiveness of the UK’s capital markets (the Investment Research Review). The review is part of the Government’s wider commitment to enhance the UK’s ability to attract companies to list and to grow.

0.2 Objectives

The Investment Research Review will consider the provision of investment research and its contribution to the competitiveness of the UK’s capital markets, and will focus on two key objectives:

1. To assess the link between levels of research and the attractiveness of the UK as a destination to list, the Investment Research Review is asked to:
   • Provide evidence on how investment research provision in the UK compares or is perceived to compare with other international financial services centers, in both public and private markets.
   • Consider the amount, quality and type of investment research currently provided on firms listed or quoted, or seeking to be listed or quoted, on UK public markets, and whether that has an effect on the attractiveness of UK markets for issuers. As part of this, consider if there are specific issues for research into the tech and life science sectors.
   • Consider the current level of demand investors have for research, factors driving this demand, and evidence of whether the amount, quality and type of investment research is sufficient to meet such demands.
2. To evaluate options to improve the UK market for investment research and provide recommendations to this effect. In particular:
   • The Investment Research Review may recommend both legislative and non-legislative measures, including measures that may fall to the Financial Conduct Authority (FCA) to consider.
   • As part of this, the Investment Research Review will consider the impact of the MiFID II unbundling rules on the levels and quality of investment research and evaluate the likely impact of any proposed changes on investment and fees.
   • Actions that industry should take.

This is not an exhaustive list, and the Investment Research Review may consider other matters that it considers to be relevant to its objectives.

0.3 Governance, engagement and timetable

The Investment Research Review is being conducted on an independent basis. It will be for the Chair of the Investment Research Review to take this work forward and for them to decide how to best to convene those with an interest in this topic. However, the Government expects that it should be carried out in consultation with a wide range of relevant stakeholders, including but not limited to the regulators, buy-side and sell-side firms, investors, independent research firms, trading venues, listed and quoted companies, and legal and academic professionals.

The Chair has agreed to report within 3 months of appointment.