Financial Conduct Authority calls time on flotation sharp practice

The City watchdog says financial markets matter and wants them to work better. It's just a shame about how it chooses to explain that

The City's big banks make a fortune from the flotations of new companies in London

“Financial markets matter to everyone,” Christopher Woolard, one of the top bods at the city watchdog declared in a speech this morning.

He was discussing plans by the Financial Conduct Authority (FCA) to crack down on some of the sharp practice that goes on in London's vibrant market for listing companies on the London Stock Exchange.

He’s right too. They matter to our pensions, and sometimes to our savings. They play a crucial role in getting capital into the hands of companies, facilitating their ability to grow and hire people to do jobs and keep the economy ticking over. And they are huge money spinners for City banks.

It’s rather a shame, in the light of what Mr Woolard said, that the Financial Conduct Authority continues to use the worst sort of bureaucratic brutalism to describe how it plans to keep the latter honest.

The regulator has identified a rather important issue: When new companies come to market, their prospectuses don’t arrive until quite late in the day. Analysts’ research on them is largely produced by investment banks with a role in advising them, because they’re the ones with access to the management.

These banks have a keen interest in making company X seem as if it’s the next Apple, Google, and Facebook all rolled into one.

The analysts they employ are supposed to be kept away from the corporate financiers who oversee floats. They have to sign chits saying their published opinions are entirely their own, and haven't been influenced by the people working near the top floor.

But the watchdog keeps hearing that corporate financiers pressure these "connected" analysts to write what can sometimes feel like puff pieces. And that won’t surprise anyone in the trade.

Even if they don’t, the average scribbler at the bank running the float will be only too well aware that their name will be at the top of the next redundancy list if they write that Company X has about as much chance of making investors money as UKIP leader Paul Nuttall has of winning a seat in Parliament.

The watchdog has sensibly decided to try and change this. To foster greater public engagement and understanding of how important wholesale markets are to the man on the street, it has entitled its consultation on doing that “Reforming the availability of information in the UK equity IPO process.” So you know it really matters.

Just a thought, but how about trying something like “Making floats fair by getting investors better research” next time? It might not attract many, or even any, more readers but if you want people to realise that this stuff actually matters, getting into the habit of talking about it in language people can understand would be a good start.

The upshot of the FCA’s reform proposals are that prospectuses should come out earlier, and independent analysts, without an axe to grind, will have to be given access to the bosses of candidate companies before analysts with a link to people whose bonuses depend on the success of a float are allowed to publish.

This should help institutional investors who look after our money get a better handle on whether Company X has a pot of gold to deliver at the end of the rainbow, or just a pile of something unpleasant.

With the exception of a few bankers, who should in future find it harder to pull the wool over investors’ eyes, everyone’s a winner.

The same, in theory, goes for some of the watchdog’s other mooted reforms. Even if you could be forgiven for asking “really?” given how the FCA has presented them.

If you think the title of the document discussed here is awful try “Review of the Effectiveness of Primary Markets: The UK Primary Markets Landscape” on for size.