The Financial Conduct Authority (FCA), the UK financial regulator, has proposed a set of changes to the way that investment managers use client commission paid to brokers for dealing in securities.
The proposals, published today, should ensure that charges paid by consumers for executing trades and related services are fairer and more transparent.
The consultation forms part of a wider discussion launched by Martin Wheatley, FCA chief executive, at the FCA Asset Management Conference in October this year, and is aimed at addressing perceived flaws in the use of dealing commission.
The FCA wants to ensure investment managers make appropriate judgments and seek to control costs to clients when using dealing commission to pay for research goods and services.
The main proposals that will be consulted on include:
- clarifying the criteria for research goods and services that can be purchased by investment managers with dealing commission paid from customers’ funds;
- defining “corporate access” and providing guidance on how investment managers should treat corporate access under the use of dealing commission rules; and
- guidance on making mixed-use assessments where investment managers purchase bundled brokerage services that contain both research and non-research elements, to ensure that only research is paid for with dealing commission.
The Financial Services Authority, the forerunner of the FCA, last changed the regime around dealing commissions in 2006 after finding that services supplied by brokers to asset managers – including research and data licences – in return for commissions could influence an asset manager’s choice of broker.
Since 2006, supervisors have increasingly come across evidence that the current regime does not sufficiently enhance transparency and accountability, Wheatley said at the October conference.
There are two persistent problems. Firstly, services are being bundled together, with eligible and non-eligible services being mixed. Secondly, when this information is provided back to the client, there is a lack of clarity or adequate transparency around how their commissions have been spent.
The FCA estimates that last year, the industry generated over £3 billion (€2.2 billion) in dealing commission, of which around £1.5 billion was spent on research. However, it is not clear that all the research commissioned offered good value to clients, or would have been commissioned if investments managers had to pay for them using their own funds, the FCA says.
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