The Quoted Company Alliance (QCA) – which lobbies on behalf of small and medium-sized companies is warning – Financial Conduct Authority (FCA) proposals could damage research coverage of its members.
As we regularly emphasise in Shares, the market is inherently forward-looking so valuing stocks based on historic performance has little value. Any reduction in coverage of small cap shares could make it more difficult for private investors to get the earnings forecasts necessary to make informed investment decisions.
The regulator is currently consulting on the use of dealing commissions – the charges paid by investors to stockbrokers and fund managers for executing trades. It has endorsed a European plan to place heavy restrictions on using this income to pay for research.
In June this year stricter regulations on how brokers and fund managers spend commissions were brought in to prevent them from paying for corporate access.
However it was still possible to use money from trading commission to pay for research as long as it was original and added value to customers’ trading decisions. Now the plan is to unbundle research from dealing commissions entirely.
The QCA says: ‘We believe that the proposals put forward by the FCA will decrease the amount of research (which is already limited) on small and mid-size quoted companies and thus be detrimental to their ability to raise finance, grow and create jobs.
‘Small and mid-size quoted companies will be the market players affected the most negatively by the full unbundling of research from dealing commissions.’
The QCA is preparing a response to the consultation and is encouraging individual companies to respond directly to the FCA.