The UK government has backed increased cost transparency for buy-side firms called for in the Kay Review, following a push toward unbundling of broker services from the market regulator.
In endorsing most of the recommendations of the review, the government signalled it would increase efforts to create more transparent practices amongst investment management firms and markets generally.
The government-sponsored review examined the short-termism of investment due to the perceived misalignment of incentives in the UK equity market.
The report contained 17 recommendations, which the government broadly agreed with, including recommendation eight of the report, which called for asset managers to disclose all costs, including actual or estimated transaction costs and performance fees charged to the fund.
In particular, the government said recent initiatives on cost transparency from industry bodies, including the Investment Management Association (IMA), were a positive sign for the industry, adding that further regulation would also be considered.
“This sort of collaborative, industry-led approach is likely to be best placed to resolve technical questions on disclosure,” the report read, adding that “The government should consider regulatory measures if the industry does not arrive at an appropriately comprehensive disclosure regime.”
The Kay report was commissioned by Vince Cable, the UK’s secretary of state for Business, Innovation and Skills, in June 2011 and conducted by economist Professor John Kay of the London School of Economics.
It suggested that good practice for asset managers should be to ensure that income generated from lending securities is rebated in full to the fund, with any related costs disclosed separately. The UK’s Pension Regulator has previously expressed concern that revenue from securities lending is not always returned to the asset owner and that end investors can be unaware that their securities are out on loan.
The government response to the report comes in the same month UK regulatory body the Financial Services Authority (FSA) signalled a clear move to separate research and execution services from brokers. So-called ‘bundling’ of commissions for mixed services can create conflicts of interest, according to the FSA, which has contacted CEOs of UK asset managers to attest their business practices were in line with FSA rules.
According to industry experts, the crackdown on the common industry practice will likely see changes in how research is compiled and sold, especially from the sell-side, and could result in higher prices for research and increased offerings from boutique firms.