The UK regulator’s plans to reform the use of dealing commissions to pay for research and other non-execution services has accelerated the existing direction of travel of the UK asset management industry, according to experts.
A Financial Conduct Authority (FCA) consultation on the use of dealing commissions, which closed last week, has called for greater transparency on payments by buy-side institutions for brokers’ execution and research services.
The regulator hopes to ensure that asset managers achieve better value for their clients’ money and only pay for research they actually use.
Richard Metcalfe, director of regulatory affairs at UK buy-side trade body the Investment Management Association, said the aims of the consultation have been broadly welcomed by the industry as it follows initiatives already being undertaken.
“What the FCA is working on feeds into a longer-term debate about making sure asset managers can get the best value for their clients,” he said. “The industry is on board but wants to see this issue handled sensibly to ensure competitiveness isn’t damaged.”
The IMA has warned that UK asset managers could be at a significant disadvantage compared to their international competitors if only the UK adopted the principles. While the FCA has said it wants to introduce any new rules as part of amendments to MiFID II, the IMA said the International Organisation of Securities Commissions should review the issue to push it into the international domain.
CSAs in development
A number of sell-side businesses have been working on developing their commission sharing agreement (CSA) offerings over the past year, seen as a key battleground for institutional brokerage businesses as the industry transitions away from bundled pricing models.
Mark Pumfrey, head of EMEA at block-crossing network operator Liquidnet, which recently launched a revamped version of its Commission Management Suite, said: “Since the FCA launched its consultation we’ve seen a big increase in interest from the buy-side. Every major institution is reviewing their CSA tools this year.”
Commission sharing is nothing new to the industry and has been debated since the Myners report of 2001 at least. However, the recent regulatory push by the FCA has led to an uptick in interest in CSAs and other forms of paying for independent research products and getting transparency on pricing.
While there has been a lot of noise around CSAs as the solution to a lack of transparency, not everyone is convinced of their benefits as they still don’t deal with the research valuation. Pumfrey suggests that more brokers will look to specialise their offering in either research or execution as buy-siders will look for clearly separated services as a way of avoiding potential conflicts of interest in their trading relationships.
“We’ve seen signs that independent research is growing and that could continue but this issue of how you reliably value your research still exists,” said Metcalfe. Long-term cross-subsidisation of research offerings with commissions means many full-service brokers have little idea of true costs of research.
Nonetheless, Pumfrey believes it is in the best interests of the industry to start pricing research properly.
“There has been overcapacity and wastage for years and asset managers know this needs to change as the increased scrutiny the industry faces means they will no longer pay for poor value added, me too services from the sell-side.”
In a recent report from the IMA on how dealing commissions could be more transparent, it noted that some smaller firms can have difficulty getting access due to brokers focusing on more profitable asset managers. It said the FCA seems relatively open about the use of CSAs to facilitate a more open research market but wants it to ensure every firm has access.
With the consultation now closed, the FCA is expected to publish feedback in the coming months and release formal rules on how asset managers should handle the payment of commissions for execution and research and ensure they are not only getting the best value for their clients but also able to prove to the regulator that they are avoiding conflicts of interest.