A Financial Conduct Authority (FCA) investigation into the use of dealing commissions to pay for research found that most asset managers failed to significantly alter their practices despite being warned on the issue in 2012.
The review of 17 investment managers between November 2013 and February 2014 found that, while most had improved their practices since receiving a ‘dear CEO’ letter in November 2012, only two lived up the regulator’s expected standards.
The other 11 firms were continuing to link the amount paid for research to the volume of trades carried out, and had failed to introduce research budgets or caps on their research spend.
Additionally, one firm was using commission to pay for market data services, something the FCA has stated is not eligible to be paid for using client funds via dealing commission.
The regulator’s investigation also looked at the activities of 13 brokers over the same time period, finding they did not explicitly price their research services, which it states makes it more difficult for asset managers to assess whether they are paying too much for research.
Brokers had also not considered the conflicts of interest incurred when arranging corporate access, with most unsure of whether they were acting on behalf of the corporate or investment manager. The FCA’s latest guidelines explicitly prohibit the use of dealing commissions to pay for corporate access.
The findings precede the FCA’s May policy statement on dealing commissions, which places tough requirements on asset managers to scrutinise their research spend and ensure they obtain good value for money on behalf of their clients when purchasing research. It also forbids use of commission to pay for services that are not considered either execution or substantive research.