MPs say UK government should consider “regulatory stick” to implement Kay Review

The UK government should be prepared to wield the “regulatory stick” to implement the Kay Review of equity markets, according to a key parliamentary committee.

Following a series of hearings – including a session where influential former City Minister Lord Myners was highly critical of the Kay report – the House of Commons’ Business, Innovation and Skills Committee has released its report into the review that was headed up by economist John Kay last year.

“We agree that the industry should be given a chance to change of its own volition but the experience of the Myners Review [in 2001] does not fill us with confidence,” the MPs say. “A cultural change will not happen without a catalyst. Ministers must be willing, and seen to be willing, to pick up a ‘regulatory stick’ should progress stall.”

The committee wants the government to immediately publish “clear, measurable and achievable” targets for implementing the review.

It says: “Lord Myners’ Review was published more than a decade ago and yet we find ourselves examining the same issues and principles in the Kay Review today. Professor Kay’s findings and proposals must not be ‘kicked into the long grass’ by the Government or the industry.”

The report makes a number of key recommendations about how to take some of Kay’s findings forward:

Investor Forum:
The committee wants the government to outline a clear timetable for setting up the Forum. “We are concerned that the hands-off approach taken by the Government runs the risk that progress will stall.” The government “has provided no remit, deadline or resource for the Investor’s Forum and the ‘working group’ to investigate the concept of the Investor’s Forum will not report until later in 2013”.

Law Commission Review of Fiduciary Duty:
The Law Commission’s report on the legal definition of fiduciary duty will not report back until June 2014: “We believe that this is too slow. We recommend that the Government liaises with the Law Commission to bring forward the timing of this project.”Fund manager incentives:
Government should take “a harder line” when framing the culture in which fund managers work – by highlighting best practice where it sees it. “We further recommend that it should work towards the goal that fund manager performance be reviewed over longer time horizons than the typical quarterly cycle.”

Fund manager behaviour:
The government should “develop and publish a set of long-term measures of success alongside options for sanctions for demonstrable failure” – and annually publish a list of those firms that have fully adopted such measures. “This would provide a different measure of success to the very short-term ones which are currently available.”

Stewardship Code:
It should be enhanced to allow investment managers to focus on strategic issues and, crucially, “include the principle that engagement and corporate governance should extend beyond financial affairs and encompass more long-term value adding activities such as environmental, social and governance factors”. The code should also include the provision that institutional investors should be members of at least one Investor’s Forum. The MPs also want “one clear and authoritative” definition of the term ‘stewardship’. The government should also outline what it considers a minimum acceptable level of sign-up to the Code and make clear that it is government policy to encourage sign-up to the Code.

Long-term research
The MPs say that asset managers are allowed to use commissions to pay for long-term research, including long-term stewardship, but that “it appears very few are aware of this”. The Financial Conduct Authority regulator should highlight this to all major institutional investors and “set out a minimum proportion of a firm’s commission” to go to this.