CLSA chief slams regulators on research
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CLSA chief slams regulators on research

Jonathan Slone argues regulators are damaging the agency broking model and not helping the clients they intend to help.

Jonathan Slone CLSA-R-600
Jonathan Slone says regulators are making a difficult situation worse

CLSA’s chief executive Jonathan Slone has attacked regulators for the damage they have caused to research-led brokerage models – most obviously CLSA.

In a long and wide-ranging interview that will appear in full in the February edition of Euromoney, Slone complained of new rules under the Markets in Financial Instruments Directive II that requires sell-side firms to unbundle fees for research provided to clients from dealing commissions.

He railed against “the unintended consequences of regulators who like nothing more than to delve into the private affairs of companies, and pootle about with their arrangements on how they pay for information, liquidity and knowledge”.

He adds: “They have not fully understood the consequences of what they’ve done, and they have not helped provide a rich marketplace for information.”

CLSA, probably more than any other major financial services institution in Hong Kong, is dominated by a cash equities business underpinned by high-quality and independent research. Even after its acquisition by Citic Securities, and the full merger with all of Citic Securities International’s overseas businesses, cash equities remains the largest part of the operation. 

Telling people what they can pay for and demanding that they pay for it in certain ways? That has created its own set of conflicts - Jonathan Slone, CLSA

Models such as this are under increasing pressure and many houses have either axed or trimmed their cash equities/research functions, among them Barclays, Standard Chartered, Nomura and Macquarie, which has the old Barings business.

To Slone, regulators are making a difficult situation worse. He says the issue is not transparency.

“Owners of money have every right to know where that money is going,” he says. “Regulators, where they have been a champion of bringing out information into the open on the fee pool and how it is divided, I think that is a wonderful thing.

“But telling people what they can pay for and demanding that they pay for it in certain ways? That has created its own set of conflicts.”

Information bypass

Among other things, Slone argues this means that the best information now passes to hedge funds rather than through more mainstream channels.

“How does that help the people that in theory these regulators are trying to help? How does it help that reams of research departments are decimated and can’t get research into the capital markets?”

“I scratch my head.”

Nevertheless, Slone argues that a business based on research and distribution remains viable, “but it needs to be sized correctly and it needs to be supported by other cash registers that you can monetize”.

This suggests a challenge to CLSA’s much-vaunted independence – all the more so as the business is merged with a Citic Securities that led regional league tables for investment banking issuance and revenues last year.

“There is a challenge, insofar as we do really want to keep the purity of our agency model intact,” he says. “But we do need to allow clients to play in other parts of CLSA, where they may not be playing in that agency model. CLSA has to go where the market wallet goes.”

The full interview in the February issue will discuss cultural integration with Citic Securities, more on the brokerage model, and client views on independence.

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