By Teletext

City analysts earn their living writing about companies, and helping investors make better-informed decisions about where to put their cash.

But their employers - investment banks and brokerages - sell services to these same companies. Can the analyst be objective when writing about a client?

The Financial Services Authority has set out measures to deal with potential conflicts of interest.

From next summer, banks and brokers publishing research on shares will have to spell out how they manage conflicts of interest, says the City regulator.

Their policies must comply with certain standards. This would include banning analysts from attending roadshows where his employer was marketing shares.

Firms failing to publish acceptable policies could not claim - or imply - that their research is objective.

Conflicts of interest for research analysts arise when their employers sell services to the companies being analysed. Investment banks might:


Act as adviser to companies making or considering an acquisition.

Act as adviser to a company floating its shares on the stock market for the first time, or selling bonds.

Lend money to companies.
Analysts writing research may face a conflict of interest if they hold shares in the companies they cover.

In 2001, US investment bank Merrill Lynch banned analysts from holding shares on companies they covered.

Not all firms agree. If an analyst has a "buy" rating on shares he owns, some say he is simply practising what we preaches. Others say he is trying to talk up the price of something he owns.

It is often difficult to prove that an analyst's views are biased.

In June, pub operator Mitchells and Butlers was set to be ejected from the FTSE 100 index of top UK companies. But a late "buy" note from Cazenove sent the shares soaring, keeping M&B in the top flight.

Cazenove supplies certain services to M&B as its house broker, but maintains this did not influence its research.

From next summer, firms that make "buy" and "sell" recommendations on company shares will be subject to stricter rules, says the City regulator. Those with conflicting responsibilities in the same firm will not be allowed to:


Supervise an analyst.

Decide on the content of Research.

Decide what an analyst gets paid.
Private investors could end up paying higher brokerage fees if research analysts can't cross-subsidise their work with other activities, says Hilary Cook at Barclays stockbrokers.

It's OK for the bigger houses, she adds. "They can afford to have separate research departments. But it's more difficult for smaller firms.

"Independence of analysts is all very well, but it comes at a cost."

My brother has been a UK FD of a number of listed companies & is currently one of a NASDAQ quoted company. The number of times he has told me of meetings held for analyst's who miss usefully information, so don't ask the right questions, and end up jumping to the wrong conclusions!

A good example of this was 3 years ago, when the share price of his company dropped suddenly. I asked why, and he told me that they had been down graded by the analyst's, because they had decided that the company could not expand in the US anymore. But the reason he had met with the analysts was to explain that they were going to expand throughout europe, and not one asked about the expansion, how they were going to go about it and what outcome the company expected. I purchased a few shares and 3 years on they are worth 250% more than I paid, because the company has grown & done well. (And that is with the NASDAQ falling throughtout the period!)