Britain's financial regulator proposes easing rule on small company research

By Huw Jones

LONDON (Reuters) -Britain's markets watchdog said on Wednesday that it proposed to copy the European Union by exempting banks and brokers from having to separately itemise research on small companies from trading costs for investment managers.

Britain put all EU financial rules into UK law ahead of Brexit, and is now looking at what could be changed to keep the City of London globally competitive after being largely cut off from the EU since full departure from the bloc on Dec. 31.

The Financial Conduct Authority said it would exempt research on firms with a market capitalisation of below 200 million pounds ($277.50 million) from current unbundling rules aimed at shining a light on costs, provided it is offered on a "rebundled basis or for free".

The proposed change would increase research coverage of small companies where sometimes there is none, the FCA said.

It was unlikely that material costs will be passed on to customers, although small company research was being subsidised by inflated trading costs, the watchdog added.

Many investment managers already absorb the cost of research for their stock picks rather than pass it on to customers.

The FCA's proposal follows a similar move by the EU in its quick-fix package of changes to the bloc's MiFID II securities law in a bid to encourage smaller companies to raise funds on markets to recover from COVID-19.

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Since Dec. 31, Britain no longer has to apply EU financial rules, but UK regulators have considered whether to adopt the changes set out in the bloc's quick fix package.

"Our analysis indicates that our proposed 200 million pound threshold better targets SME companies where investment research coverage is at its poorest," the FCA said in a consultation paper.

The EU set a higher threshold of 1 billion euros but the FCA said the UK cut-off level reflected the FCA's own analysis and the different circumstances in Britain.

The FCA also proposed removing some best-execution requirements on trading platforms and investment firms that help investors see whether they are getting the best deals.

Priorities for UK markets reform will be transparency in stocks, bonds and derivatives, the cost and distribution of market data, and commodity derivatives markets, the FCA said.

($1 = 0.7207 pounds)

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(Reporting by Huw Jones; Editing by Alex Richardson and Louise Heavens)