Policy paper

Call for Evidence – UK Investment Research review

Updated 11 July 2023

Background to the review

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.

In December 2022, the Chancellor announced that he would be launching an independent review of financial services investment research and its contribution to UK capital markets competitiveness as a part of the government’s broader work to increase the attractiveness of the UK as location for large and small companies to raise capital.

Investment research provides investors with information that allows them to understand a company’s business model, performance, and risks, and therefore to assess its value as an investment.

Investment research can provide investors with information that can allow them better to understand a company’s business model, performance, and risks, and therefore to assess its value as an investment. The right depth and breadth of investment research is vital to ensure that markets operate well and that companies obtain the valuations they deserve. Low levels of investment research can make it harder to value companies and can make it more difficult for companies to attract investors.

Some concerns have been raised about the quality and quantity of investment research produced in the UK compared to other jurisdictions (especially the United States), in particular for high growth sectors such as technology and life sciences, and that this could undermine valuations and, therefore, the attractiveness of the UK as a place to list.

Purpose of the review

The review has been set up to examine the link between levels of research and the attractiveness of the UK as a destination for companies to access capital, both in private and public markets.

This call for evidence is the first step in the review.

The review will gather information and evaluate options to improve the UK market for investment research and provide recommendations on how to improve the research landscape in the UK with the aim of making the UK a more attractive location for companies looking to list and access capital.

The 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:

• To assess the link between levels of research and the attractiveness of the UK as a destination to list.
• To evaluate options to improve the UK market for investment research and provide recommendations to this effect.

The review’s recommendations may be addressed to the government, the regulators and to industry and will not be limited to proposals for legislative or regulatory change.

All interested parties, including buy-side and sell-side firms, listed and unlisted companies, investors, independent research firms, trading venues, and legal and academic professionals, are invited to provide their views.

Input is welcomed from all market sectors, including (but not only) the technology and life sciences sectors.

Questions in respect of which views are sought

A non-exhaustive list of questions on which views are sought in this call for evidence are set out below. Inclusion of supporting examples and evidence will be very helpful if possible.

1. How does investment research provision in the UK compare, or how is it perceived to compare, with other major international financial services centres?
2. What is your assessment of the amount, quality and type of investment research currently provided on companies that are listed or quoted, or seeking to be listed or quoted, on the UK public markets?
   • Has that position changed since 2014 (when the UK took steps regarding the use of dealing commission) (or earlier) or 2018 (when the MiFID II unbundling rules came into effect)?
   • If you are aware of particular differences relating to specific sectors (e.g. technology and/or life sciences), please provide further details.
   • If you are aware of particular differences with other jurisdictions, please provide further details.
3. How important is investment research to the attractiveness of the UK public markets to listed companies (or companies considering listing) and their investors or to companies looking to access capital in private markets? - Is there a specific link between research and valuations for listed companies or those seeking to list?
4. Are there specific issues relevant to UK investment research on technology and life sciences companies that should be addressed, including compared to other jurisdictions?
5. Are there specific issues relevant to UK investment research on smaller UK listed or quoted companies that should be addressed?
   • What counts as “smaller” for these purposes?
6. What demand do investors have for research on UK listed and quoted companies, what are the factors driving this demand, and is the amount, quality and type of investment research currently provided sufficient to meet this demand?
7. What impact does the current UK legislative and regulatory environment have on the provision and quality of research, including (but not limited to) the MiFID II unbundling rules? Please provide references to relevant legislative/regulatory provisions with your answer where relevant.
8. Have the UK 2022 revisions to the MiFID unbundling rules applicable to smaller quoted companies helped to facilitate investment research in relation to those companies?
   • Have these revisions made it more likely that research firms will undertake research on smaller quoted companies?
   • Is the £200 million market capitalisation threshold appropriate? If not, do you think that a size threshold is the most appropriate tool to incentivise research in smaller companies? If so, what should the level of the threshold be?
   • For UK firms also operating in the EU, does divergence between UK/EU thresholds have an impact (for example affecting where they decide to do business)?
9. What might be the impact of any changes on the proposed UK legislative and regulatory environment on the provision and quality of research, the management of conflicts and payment for the provision of research?
10. Are there impediments (actual or perceived) to dialogue between UK listed or quoted companies and investment analysts that impinge the quality of research that should be considered and addressed?
11. Are there other impediments (actual or perceived) on the provision of research to investors – whether institutional or private – that should be considered and addressed?
12. What steps (legislative and non-legislative) could be taken to improve the provision and quality of research on UK listed and quoted companies?
    • Please identify any advantages/ disadvantages and overall impact associated with any step you suggest

You are encouraged to provide input and views on any matters that you think would be helpful to the review including supporting examples and evidence where available. You should not feel obliged to answer all of the questions.

How to respond

The call for evidence is open for 3 weeks until 24 April 2023. Responses can be in as detailed or summary form as you wish – headline points are welcome, as are comprehensive submissions. To support your answers above, please provide examples and/or evidence, if possible. Should that not be possible (e.g. because there is no available evidence that you are aware of), please provide an explanation.

Please submit your responses to: IRR@hmtreasury.gov.uk

The names of respondents to this call for evidence will be published (unless specifically requested otherwise), but their responses will not be made public by the review.

We are grateful for the support of The City of London Corporation as secretariat for the review.

Next steps

This call for evidence is only part of the consultative process. The review will also hold a series of discussions with interested parties to explore the issues raised further. The review will then provide its report to HM Treasury.

We very much welcome and look forward to your participation.

Rachel Kent
Chair of the Investment Research Review

3 April 2023