Specialist software and services provider Blue Curve reports
that only 11% of investment banks surveyed by the company in May
believed they would be compliant within the deadline.
The FSA has ruled that by 1st July 2004, investment banks must
put in place a policy to govern conflicts of interest in investment
research, and ensure that their systems, controls and procedures to
implement the policy are robust and adequate to identify the
conflicts which may occur.
To be compliant with these new rules, firms must ensure that
adequate reporting and tracking software is in place to maintain a
full record of their commercial activities in relation to the
subjects covered in their investment research.
Blue Curve's research suggests that despite the deadline, the
majority of investment banks in the City of London remain unable to
provide the full audit trails required to ensure compliance with
the impending legislation, with only 11% of those polled by the
company claiming to have a strategy in place and believing they
would meet the deadline.
Of the 308 polled, 79% were complacent about compliance, with no
interest in putting a strategy in place. A further 9% were not yet
compliant, but interested in becoming so.
"Our research shows that the majority of banks will fail to meet
the deadline, or are unaware of the true implications of the new
rules. The complacency we have detected is caused by firms not
appreciating the full impact of the new regulations, and so not
giving them the priority they require. But the banks face being
perilously exposed," said Mark Robertson, managing director of Blue
Curve.
"To feel comfortable that the firm is compliant, senior
management must be confident that their systems can provide
complete and accurate information on the true state of the firm's,
and the analyst's, position at the time of publication of each
piece of research. Plus they must keep those records for many years
after publication," said Robertson.
The FSA regulations state that firms will in future have to
develop and publish policies to ensure that their research analysts
do not compromise their objectivity. The final rules, announced in
March, are an attempt to ensure that conflicts of interest that
arise in the production of investment research are disclosed to
clients in order to ensure objectivity.
Each investment bank's policy has to make clear what of the
material it produces it considers to be objective research. They
also need to put in place measures that ensure their analysts'
impartiality, and these measures must be clearly set out in the
policy statement. Without such policies, the banks are not allowed
to claim or imply that their research was objective.
The FSA's legislation follows similar moves in the US, where New
York Attorney General Eliot Spitzer has prompted industry reforms
through investigations of mutual fund, insurance and stock research
businesses.
"The FSA legislation has resulted in a regulatory minefield for
the investment banking sector, and the only way to ensure
compliance is to deploy standardised software so that organisations
can be sure they won't fall foul of the reporting elements of the
legislation," added Robertson.
