An end to 'corporate access'?

Investment banking is an area rife with potential conflicts of interest, as the dot-com crash a decade ago showed. Investment analysts, for example, were paid to make recommendations to their banks' fund manager clients while also getting involved in promoting the shares that the corporate finance wing of the banks were trying to sell. In the aftermath of that crash, investment research changed radically, and in its place came, among other things, greater practice of what the banks call "corporate access" – getting corporate executive into the same room as fund managers for a private or semi-private tête-à-tête. This service – nominally free to the fund manager – often forms part of the bundle of things the banks give to clients to generate transactions commission. Now a think-tank thinks it's time to rethink that, too.

EuroIRP, a trade association of independent research analysts, commissioned a report from the Centre for Financial Innovation that argued that corporate access is just another way of creating an uneven playing field between the banks and the independent researchers who have to charge for their services. They got a boost in the UK when the Financial Services Authority forced banks to "unbundle" their services to buy-side houses, so only "research" could be tied to execution services. The CSFI report says: "Five years after the introduction of the FSA's new regime on unbundling, the independent research sector is growing, both in number of firms and in the demand for their services by buy-side fund managers." But that doesn't mean everything is rosy. Revenues from the buy-side are under pressure. "The sell-side model is increasingly a combination of execution, research that at times is commoditised and corporate access based on leveraging client banking relationships," it says. "Corporate access does not fall within a definition of research, which requires it to contain 'original content' and is, therefore, not a legitimate use of dealing commissions."

Not all "independent" researchers are independent, of course. One version of the practice involves companies paying the research firm to write an analysis of the company. That's normally governed by a contract that limits such reports to analysis and not recommendation. But that, too, is a tough sell, even if the buy-side doesn't have to pay for it.

Source document: The research report "Has independent research come of age?," by Vince Heaney, is a 40-page pdf file.