The UK’s Financial Conduct Authority (FCA) has thrown its support behind the European Securities and Markets Authority’s (ESMA) new rules on dealing commissions, saying they remain compatible with its own rulings.
In a feedback paper, the FCA said: “We believe ESMA’s proposal will lead to direct accountability over the expenditure on third party research by portfolio managers and how these costs are passed to their customers, leading to better outcomes for investors across the EU.”
Last year, the FCA consulted on the introduction of new rules to make the research market less dependent on receiving commissions from executions and remove conflicts of interest in the research procurement process. However, it held off publishing full guidelines in order to see how ESMA tackled the issue in MiFID II.
ESMA had initially proposed a stance that many saw as overly harsh, which would require research to be paid for completely independently of execution and from an asset manager’s own funds, rather than client accounts.
The pan-European regulator climbed down in its latest consultation paper published in December 2014, instead mandating that research must be paid for either directly by an asset manager or via a “research payment account”, which would be funded by specific charges to clients, agreed and disclosed upfront and based on a research budget that is not linked to execution volume.
Commenting on the proposed research payment account, the FCA paper added: “it recognises that external research can be a core cost of business to a portfolio manager in developing investment ideas. It will, under ESMA’s proposals, be a cost and charge that is akin to a portfolio manager’s own spending on analysts and internal research, which they already reflect in their upfront annual management charges.”
It also said the research payment account should help alleviate concerns of smaller asset managers and help ensure brokers remain incentivised to produce research on SMEs.
The research payment account is now likely to replace existing commission sharing agreements, which are an industry-led initiative to enable buy-side first to purchase research and execution from different providers by splitting commissions.
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