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Brussels, 4th September 2003

Financial analysts: Commission invites comments on avoiding conflicts of interest

The European Commission has invited comments from investors, market practitioners, regulators and the wider public on recommendations concerning how to avoid potential conflicts of interest when financial analysts in investment banks advise clients on investing in companies for which their bank also provides paid services. Comments are invited on the basis of recommendations suggested by a Forum Group on Financial Analysts, set up by the European Commission in November 2002 (see IP/02/1763) in response to the conclusions of the informal meeting of Economics and Finance Ministers at Oviedo in April 2002. The recommendations aim to set out the best regulatory and market practice framework for financial analysts within an integrated European capital market. They place great emphasis on the role of senior management in ensuring that conflicts of interest between the investment banking and research departments of investment banks are avoided or properly managed and disclosed to investors. The Commission will take comments on these recommendations into account in its reflections on whether action at the EU level is necessary in this area. The Group's report is available on the Commission's Europa website:

Welcoming the report, lnternal Market Commissioner Frits Bolkestein said: “This report is an important contribution to a debate that has often been politically charged. We set up this Group primarily to advise on best practices that investment banks might put in place in order to help restore investor confidence. If an investment bank is being paid by a company for corporate finance services, that bank's analysts may feel under pressure to advise investment customers to put their money into that company, even if it is in serious difficulties. We need to protect European investors from such fraudulent behaviour. But we also need to be careful not to throw the baby out with the bathwater by depriving investors or listed companies of access to expertise they need. We will now analyse the Group's findings and decide whether we think further action is necessary at EU level.”

The Forum Group has produced a list of five core principles which it believes should be applied by those producing and disseminating investment research:

  • Clarity: research should be fair, clear and not misleading

  • Competence, conduct and personal integrity: research should be produced by competent analysts with skill, care, diligence and integrity; and it should reflect the opinion of its author(s)

  • Suitability and market integrity: research should be distributed taking into account the different categories of its intended recipients and the need to maintain market integrity

  • Conflict avoidance, prevention and management: analysts' firms should have in place systems and controls to identify and avoid, prevent or manage personal and corporate conflicts of interest

  • Disclosure: conflicts of interest, whether corporate or personal, should be prominently disclosed.

The report makes 31 recommendations which relate to these principles. These focus in particular on conflicts of interest resulting from analyst involvement in securities offerings and other corporate finance work; best practice for companies issuing securities; remuneration of analysts; securities dealing by analysts; qualifications; and the distribution of investment research to the retail market.

In assessing the Group's report and any necessity for follow-up action at the EU-level, the Commission will seek to strike a balance between:

  • ensuring investor protection

  • allowing investors to benefit from an open and competitive market for financial research and investment advice

  • avoiding undue restrictions on the services investment banks can offer, thus ensuring that listed companies have access to the corporate finance services they need.

The Commission will also take into account the extent to which recently agreed EU legislation and legislative proposals namely the Market Abuse Directive (see IP/02/1547 and IP/03/345) and the proposed Investment Services Directive (IP/02/1706) will introduce regulatory provisions affecting analysts and meeting some of the Group's concerns. For example, the Market Abuse Directive establishes transparency standards requiring that persons who produce or disseminate information recommending or suggesting investment strategies to the public or to distribution channels disclose their interests or conflicts of interest and fairly present such information.

The Commission welcomes comments on the Forum Group's findings until 30th November 2003. Comments should be sent to:

All comments sent to the Commission will be made public and posted on the Europa website.

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