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FCA to review use of dealing commissions
30 October 2013
UK regulator acknowledges need to consider reform of asset managers' use of dealing commissions. Spoke at the FCA's annual asset management conference
Speaking at today’s Financial Conduct Authority (FCA) asset management conference in London, the authority’s CEO Martin Wheatley said it was opening a domestic debate on whether there is a need to reform the use of the dealing regime and particularly the use of dealing commissions.
“We know from recent studies that the prime determinant of investor satisfaction remains quality of service. If investors develop fears over charging, or lose confidence in asset management firms, they can and will look for solutions elsewhere,” said Wheatley.
He added that strides have been taken to help ensure the industry provides value for money and is also open-handed and transparent in supporting clients.
However, he said that questions remained and that the system is not working like it used to. “Has all of this change been to the benefit of customers? Has the purpose of an asset manager to offer a transparent balance of risk and reward changed? Is there more that we can do to compete for investors based on enhanced customer-focus?”
According to Wheatley, over the last seven years supervisors have increasingly come across evidence that the current dealing regime does not sufficiently enhance transparency and accountability for two reasons. 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.
Wheatley said that of most concern is that firms are pushing the definition of ‘research’ by using client commissions to cover non-eligible costs and services. He said a “significant chunk of clients’ commission” is being paid for corporate access services from investment banks and brokers. The FCA estimates that anything up to £500m of dealing commission was spent in 2012 for corporate access services.
In the same year it discovered a firm that was rewarding brokers predominantly based on the corporate access they provided. This averaged out to each individual investment manager paying more than £100,000 just to gain access to the management of companies they wanted to invest in.
He says industry members and representatives - including the Investment Management Association (IMA) - have recognised that certain practices need to change and that this recognition will also need to extend to the sell-side providers of these services.
“In a nutshell, this type of outdated bundled charging system and use of dealing commissions to purchase research lacks the transparency that has attracted a global consumer-base, distorts competition and supports unsustainable business models.”
Wheatley confirmed that the FCA will conduct a thematic review following up on its conflicts of interest findings from last year, looking at both buy-side and sell-side practices.
During a panel discussion at the conference, an audience member pointed out that asset managers cannot control the costs of services provided by investment banks and other large corporate entities. He stressed the need to focus on the sell-side rather than the buy-side: “You have to get [the sell-side] to change their behaviour and penalise them if they do something wrong.”
In response, the panellists representing the FCA stressed that it would look at both buy- and sell-side and that at the moment it just wants to gather information to see if competition is working in this area.