A new push toward unbundling

Regular interviews I have conducted over the past half-decade with heads of trading in the UK indicate that unbundling of payments to brokers for execution and research services is still not yet the accepted norm. But a new document published last week suggests the Financial Services Authority (FSA) is preparing for a final push to provide a greater level of transparency to clients.

The report, ‘Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks’, compiles the findings of ‘thematic reviews’ of asset managers’ approaches to managing conflicts of interest, which took place between Jun 2011 and February 2012. It touches on a wide range of issues, from allocating the cost of errors between asset managers and customers to the treatment of gifts and entertainment. But it also reveals a spectrum of approaches by asset managers when using client money to buy research and execution services from brokers.

On the bright side, the FSA found an example of good practice. One firm demonstrated that it “carefully considered which services represented valuable inputs to its investment process and challenged brokers about why it should pay for other services”.

But there were plenty of examples of a slightly more cavalier approach, including “no central organisation of commission payments, where individual fund managers paid for research services by directing business to particular brokers on a trade-by-trade basis”.

Some might be surprised to find portfolio managers directing trades based on research needs over a decade since the Myners review of UK institutional investment. But not many.

Elsewhere, the FSA found commissions being used to pay for market data services, in contravention of guidance on what constitutes research. It also questioned whether corporate access services from brokers constituted either research or execution services.

Overall, the regulator seems to have found a good deal of evidence of poor controls over how client money is spent. So what will the FSA do next? As well as taking actions to ensure future compliance, the FSA plans a second round of ‘thematic visits’ on conflicts of interest and is asking all regulated CEOs to attest that their conflict of interest arrangements are in compliance with FSA rules.

But it’s unlikely to stop there. The document may well be an early warning to trading desks that unbundling must be seen to be done.