The regulator is consulting on changes to the rules on 'dealing commission', or charges passed on to consumers to cover the cost to the fund manager of executing trades, research and related services. It is seeking feedback on these "more immediate improvements" by 25 February 2014, alongside a wider "open discussion" on the need for more dramatic reforms, it said.
"The consultation paper builds on the themes raised by Martin Wheatley at the FCA's asset management conference in relation to clarifying the use of broker research and defining corporate access," said financial services regulation expert Monica Gogna of Pinsent Masons, the law firm behind Out-Law.com. "It is good to see that the FCA recognises the importance of engagement with both the sell and buy side in terms of the next stage of the initiative."
"In the period leading to the end of the consultation, firms should seek to engage with the regulator and industry bodies to ensure that their practical knowledge of how commission payments work and the effort taken to unbundle these payments is fully recognised by the regulator. It is clear that firms will need to review closely their existing arrangements to identify whether they are 'fit for purpose' under the new proposals, as it is likely that a number of firms will need to revise existing terms and make them more robust to deal with this revised regime," she said.
According to FCA figures, the £5 trillion asset management industry generated over £3 billion in dealing commission last year, of which around £1.5bn was spent on research. However, it was not clear if this research was of sufficient quality or whether managers would have paid for it out of their own funds. Speaking at the regulator's asset management conference in London last month, FCA chief executive Martin Wheatley also raised concerns about the "bundling" of services and the lack of transparency about how charges paid by retail investors were actually used.
The consultation looks at three areas of the dealing commission regime. These are clarifying what payments can be made to banks and brokers for research; a ban on payments for 'corporate access'; and more transparency over payments for 'bundled brokerage services'. It includes guidance to investment managers making mixed-use assessments to ensure that only the research part of any bundled service is paid for out of dealing commission.
The FCA defines payments for corporate access as those made to brokers to arrange meetings with firms they have or are considering investing in. The consultation does not propose banning this practice outright, or even preventing managers from passing these costs onto their customers as long as they comply with their duties to manage conflicts of interest, act in the best interests of their clients and not mislead them. Instead, these costs must be treated as "a core cost of business" rather than paid for from dealing commission.
The consultation also proposes clarifying what research goods and services can be purchased using dealing commission. Research must be capable of adding value to the investment by providing new insights, represent original thought rather than repeating or repackaging previous research and have "intellectual rigour" in order to be eligible, according to the consultation.
"We need to be confident that managers are putting their clients' value for money, good returns, and transparency at the heart of how they do business," Wheatley said. "So today's consultation is part of a wider debate on the need to reform the use of the dealing regime, particularly the use of dealing commissions, and how industry practice can be improved now to the benefit of all."
"As a forward-looking regulator, we expect firms to exercise judgement to act in the best interest of their clients - seeking to manage their clients' costs as effectively as they pursue investment returns," he said.