Brokers have been warned not to use “artificial” conclusions in their research in order to make it compliant with new UK rules on the use of dealing commissions.
In a Financial Conduct Authority (FCA) policy statement on the use of dealing commissions, the regulator clarified how the buy-side should define what was considered substantive research and said brokers should not circumvent its rules.
In a consultation paper published in November last year, the FCA outlined its plans to remove conflicts of interest in the use of dealing commissions to pay for bundled execution and research services, saying asset managers should ensure research they paid for was substantive and provided value to their customers.
It had called for research to reach “meaningful conclusions”, but concerns were raised during the consultation that brokers might simply provide concluding remarks in their research papers to comply with this rule.
The policy paper clarified: “We would not expect an investment manager to accept as substantive research a good or service that only has a purely ‘artificial’ conclusion added by a broker or third party, which some respondents suggested may occur in response to our changes.”
The paper also provided further information on how research should be used and considered to add value. It said asset managers did not need to reach a buy or sell decision from research they have received but simply need to have reasonable grounds to be satisfied that what they do receive provides value for their investment process, even if they do not act upon it.
Overall, the policy remains largely the same as outlined in the original consultation paper and the FCA said the feedback it received was overwhelmingly supportive of its efforts to reform the research market.
One of the biggest changes the industry will face is that corporate access can no longer be considered an eligible research cost and must be fully unbundled from commission payments.
As a result, it has published new rules for the Conduct of Business Sourcebook, which will come into force on 2 June 2014. It has encouraged firms to ensure they are familiar with the new rules prior to that date. The policy statement and summary of Sourcebook changes can be found here.