The Government put the fund management industry on notice yesterday that it had until the end of the year to become far more transparent and start paying for independent research.
Ruth Kelly, the Financial Secretary to the Treasury, warned the industry that if it has not made substantial progress by December, the Government would seriously consider introducing legislation to force fund managers and pension fund trustees to embrace the code of conduct set out by Paul Myners two years ago.
Speaking at the National Association of Pension Funds conference in Edinburgh, Ms Kelly said Consensus Research, a market research company, had been employed to carry out a "very thorough study" of the industry. It will report its initial findings to the Government in the summer and submit a final report in December.
Paul Myners, the former chairman of Gartmore Fund Management, attacked pension fund trustees and fund managers for not monitoring companies they invest in rigorously enough two years ago.
Mr Myners also highlighted the problem of so-called soft commissions, the fees brokers charge for research, which are bundled into the total cost of share trading. Mr Myners suggested research should be paid for separately to encourage analysts to be more robust in their criticism of companies because the research would not be linked to institutional investors' decisions to buy shares.
The Financial Services Authority warned last year that house brokers were twice as likely to recommend a buy on a company than other stockbrokers. The City watchdog will announce its own proposals to crack down on soft commissions very soon.
The Government wants the corporate governance regime to remain voluntary, but it did float the possibility last year of introducing legislation that would require fund managers to act in the best interests of the "ultimate beneficiary"' individuals with pensions for investment in their funds.
The investment industry, already struggling from three years of falling stock markets, feared legislation would lead to a steep increase in legal cases from individuals who have lost money in the stock market, especially in cases of corporate disasters such as Marconi.
Ms Kelly also tried to silence critics of proposals to introduce a lifetime limit of tax-free pension contributions at £1.4m, saying the plan had been misperceived. She insisted only 5,000 people would be affected by the change.
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