Brokers will need to provide greater transparency and broaden the availability of some services to successfully implement Financial Conduct Authority (FCA) plans to separate the cost of research from dealing commissions, a report by UK buy-side body the Investment Management Association (IMA) has said.
In a report published today, the IMA said there is a need to improve the way the research market operates but said several challenges lay ahead of the industry.
The report is a response to the FCA’s November consultation on the use of dealing commissions to pay for research and corporate access, in which the UK regulator proposed that asset managers should face more formal rules to ensure they obtain value for money from research providers.
One of the IMA’s key concerns is that some brokers which provide execution and research may favour larger asset management clients. It claims small asset managers are often unable to access commission sharing agreements (CSAs), which could effectively tie them to acquiring both execution and research from the same broker.
The report said it is important that any investment manager that wants to use a CSA is able to do so and said the IMA will also consider creating a model framework agreement to assist in enabling buy- and sell-side firms to agree on the use of CSAs.
IMA chief executive Daniel Godfrey said: “We’ve been working closely with the Association for Financial Market in Europe and the sell-side and they recognise that buy-side firms want to change the way they operate to provide better transparency for clients.
“They want to co-operate and ensure we can get more information about what is being received when paying for bundled services.”
Another significant problem with the existing research market is a lack of data on the level of payments made for bundled services.
Currently, there are three main sources of research in the market; full-service providers who are paid on a blind auction basis, independent providers who offer a variety of pricing models, and internal research conducted by asset managers.
For the market to function efficiently, parties should be able to make informed decisions about pricing based on comparisons between providers, which is not currently possible due to various and often opaque pricing structures, according to the IMA.
It suggests research price information could be published so that firms can benchmark against their own research costs to better evaluate the true value of research.
The report also considers the potential for a more radical reform of research payments, via the move to a cash market where research is explicitly priced and paid for completely separately from dealing commission, most likely from an asset manager’s own funds.
However, there are several potential barriers to this approach, including the need for international consensus.
“We believe that radical change would need to be introduced on an international basis to avoid both arbitrage and damage to the UK’s competitive position,” said Godfrey.
To prevent regulatory arbitrage and preserve UK competitiveness, the IMA said the FCA should engage the International Organization of Securities Commissions (IOSCO) to co-ordinate global efforts to reform the way research and execution are paid for.
The FCA has already stated it plans to push for its new rules to be included as part of pan-European regulation MiFID II once it reaches its level 2 implementation stage, but the IMA said the global nature of trading means the rules should be extended beyond EU borders.
Other potential problems with adopting a cash model is the difficulty of charging clients more through management fees, which have generally seen a deflationary trend in recent years. Though the overall cost remains the same and may even be cheaper, individual investors may be more reluctant to pay once the full costs become transparent.
A cash market may also be detrimental to start-up investment managers, many of which value to ability to pay for research after the event via their dealing commission.
The IMA said it will continue to work with the FCA to ensure that research payments are reformed in a way that provides more transparency for both asset managers and their clients. The FCA’s consultation closes on 25 February.