Watchdog looking at new controls

THE Financial Services Authority is looking at tough new controls to prevent conflicts of interest within big City investment banks after the US scandal over tainted advice by Wall Street giant Merrill Lynch.

FSA chairman Sir Howard Davies said on Wednesday night that the danger of biased share tipping was not so great here as in America, because we do not follow 'the cult of the guru analyst'. But he added that the FSA may 'need to say more' about how highly-paid City analysts are rewarded, to ensure that their tips are not influenced by the hope of raking in a large bonus on deals from friendly companies.

He added that the rules on managing conflicts of interest and share dealing ahead of issuing research are not 'sufficiently clear cut'. The FSA is to issue a discussion paper on how the regulations can be improved.

Merrill Lynch this week paid £70m to settle an investigation by New York state attorney general Eliot Spitzer into some of its hyper-bullish dotcom analysts.

Regulators on both sides of the Atlantic are concerned that some analysts may tip undeserving shares as 'buys' in order to butter up company executives into paying huge sums for investment banking services. Many analysts are paid up to £200,000 a year salary, but can earn up to £1m if they help drum up big deals. Merrill and other large US firms including Goldman Sachs have agreed to stop linking analysts' pay to fees earned on deals.

The Spitzer settlement came as a relief to Merrill, though it may still be sued by individual investors. It spares the firm from having to set up a fund to pay damages to investors who have lost out. Insiders had also feared that Spitzer might have forced a total separation of research and investment banking.