UK investment banks complacent about conflict of interest compliance - Blue Curve

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The vast majority of UK investment banks are being complacent by failing to ensure that their IT systems enable compliance with the Financial Services Authority's (FSA) new conflict of interest legislation despite a looming regulatory deadline, according to specialist software and services provider Blue Curve. Only 11 per cent of investment banks surveyed by the company in May believed they would be compliant within the deadline.

The FSA has ruled that by 1 July this year investment banks must put in place a policy to govern conflicts of interest in investment research, and ensure that their systems, controls and procedures to implement the policy are robust and adequate to identify the conflicts which may occur. To be compliant with these new rules, firms must ensure that adequate reporting and tracking software is in place to maintain a full record of their commercial activities in relation the subjects covered in their investment research.

Blue Curve's research shows that despite the deadline, the majority of investment banks in the City of London remain unable to provide the full audit trails required to ensure compliance with the impending legislation, with only 11 per cent of those polled by the company claiming to have a strategy in place and believing they would meet the deadline. Of the 308 polled, 79 per cent were complacent about compliance, with no interest in putting a strategy in place. A further nine per cent were not yet compliant, but interested in becoming so.

"Our research shows that the majority of banks will fail to meet the deadline, or are unaware of the true implications of the new rules. The complacency we have detected is caused by firms not appreciating the full impact of the new regulations, and so not giving them the priority they require. But the banks face being perilously exposed," said Mark Robertson, managing director of Blue Curve.

"To feel comfortable that the firm is compliant, senior management must be confident that their systems can provide complete and accurate information on the true state of the firm's, and the analyst's, position at the time of publication of each piece of research. Plus they must keep those records for many years after publication," said Robertson.

The FSA regulations state that firms will in future have to develop and publish policies to ensure that their research analysts do not compromise their objectivity. The final rules were announced in March, http://www.fsa.gov.uk/pubs/press/2004/026.html, and are an attempt to ensure that conflicts of interest that arise in the production of investment research are disclosed to clients in order to ensure objectivity.

Each investment bank's policy has to make clear what of the material it produces it considers to be objective research. They also need to put in place measures that ensure their analysts' impartiality, and these measures must be clearly set out in the policy statement. Without such policies, the banks are not be allowed to claim or imply that their research was objective.

The FSA's legislation follows similar moves in the US, where New York Attorney General Eliot Spitzer has prompted industry reforms through investigations of mutual fund, insurance and stock research businesses.

"The FSA legislation has resulted in a regulatory minefield for the investment banking sector, and the only way to ensure compliance is to deploy standardised software so that organisations can be sure they won't fall foul of the reporting elements of the legislation," added Robertson.

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