FSA attacks share buying advice

THE credibility of the City's leading investment banks was today shredded by the Financial Services Authority, which accused them of putting unjustifiable 'buy' recommendations on shares to ensure their firms won or retained lucrative corporate advisory work.

In a stinging attack on the research reports written by the banks' analysts, FSA chairman Sir Howard Davies said 80% of all assessments produced by the so-called house brokers' 'buy' recommendations.

This was almost twice as high as the proportion of 'buy' recommendations put on shares when the analyst's firm did not work for the company being studied.

Davies also questioned the huge number of 'buy' recommendations being generated by the banks generally. He said there was reason to believe their recommendations had been more positive than subsequent share-price performance would justify.

'There is some evidence that analysts' recommendations in relation to companies with which their parent house has a relationship are systematically more positive than the average,' he said.

'It is difficult to see how the differential in buy recommendations can be justified on any objective grounds.'

His comments accompanied the launch of an FSA discussion paper on whether the watchdog needs to tighten laws governing the banks' research.

The FSA's attack was supported by the Association of British Insurers, which said analysts were held in low regard by investors. 'Sell-side analysts have to recognise that their reputation with the investors who buy the securities they cover is not very high,' said Peter Montagnon, head of investment affairs at the the ABI.

'There is a fairly high degree of scepticism about objectivity, and this has led to large institutions developing their own inhouse expertise.'

The National Association of Pension Funds also welcomed the FSA's move, though it questioned whether further regulation was needed, and the Association of Private Clients and Investment Managers (Apcims) called for greater disclosure of banks' relationships and how analysts were paid.

The FSA added: ' Increasingly, analysts have played a role in helping their firms obtain underwriting and mergers-and-acquisitions advisory business. These other functions can give the analysts diverse incentives and the interests of retail investors are likely to be forgotten.'