Watchdog Mauls Brexiteers' Dream

(Bloomberg Opinion) -- Britain's Financial Conduct Authority is reviewing how the finance industry is implementing Europe Union rules on how research gets paid for. It's evidence that even with Brexit looming, the U.K. regulator will seek to maintain the highest governance standards.

But that hardline stance risks leaving a blot on FCA Chief Executive Officer Andrew Bailey’s resume if he applies for the job of Bank of England governor next year.

The MiFid II rules that came into force at the start of the year require asset managers to pay for research and trading services separately. The FCA will investigate whether some banks are offering research on the cheap, undermining the rules' aim to prevent written analysis from influencing who fund managers transact with.

The business of equity analysis was already being squeezed before the latest instalment of the Markets in Financial Instruments Directive. The 12 biggest investment banks have cut their equity research staff by about 20 percent in the past eight years, according to research firm Coalition Development Ltd. Nordea Bank AB estimated last month that there are only about half as many equity analysts covering small- and medium-sized firms in Europe as there were before the 2008 financial crisis.

JPMorgan Chase & Co.'s clients want to cut research spending by as much as 30 percent from last year, the bank's co-President Daniel Pinto said last month. Craig Sterling, the director of U.S. equity research at Amundi SA, Europe's biggest fund manager, said last month that his firm finds "less and less value" from sell-side analysts.

So it's little wonder that the industry is going through a difficult period of price discovery. What's remarkable is that that the U.K. regulator has been first out of the gate to examine it -- even though firms all across the EU are wrestling with the same challenge and running the same risks of falling short in their execution.

For some Brexiteers, looser rules will be a way of maintaining London's pre-eminence as the financial capital of Europe after the divorce. In April 2017, Marc Vanheukelen, EU ambassador to the World Trade Organization, branded the model as "Singapore-on-Thames."

But U.K. regulators earned their reputation for gold-plating EU laws over several years. The FCA move suggests a willingness to remain at the vanguard of watchfulness. And that may, at the margin, undermine the FCA chief's chances of replacing Mark Carney as head of the BOE in June next year.

Bailey is the front-runner for the position, ahead of Ben Broadbent, the BOE's deputy governor for monetary policy. Bailey's former roles at the U.K. central bank include deputy governor, chief cashier and CEO of the Prudential Regulatory Authority.

But the governorship is still a political appointment, and a role that carries far more regulatory power over the finance industry than Bailey's current position.

By the time Carney rides into the sunset, the government may well want to turn London into Singapore-on-Thames to staunch a post-Brexit outflow of capital and talent. What might look like excessive diligence on the part of the FCA could yet undo Bailey's ascent of the greasy pole.

©2018 Bloomberg L.P.

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