The UK regime governing dealing commissions has helped cut commission rates, limited use of commissions to the purchase of execution and research services and encouraged greater separation in how these services are bought, the Financial Services Authority (FSA) said.
In a review of the framework for buy-side use of dealing commissions introduced in 2006, the UK regulator claimed that benefits had been “clearly delivered” to the market, adding that the “expected changes were occurring and that the market was moving towards delivering the intended outcomes”.
The FSA report noted that use of commission sharing agreements (CSAs) had increased, with 70% of investment managers using CSAs compared with 50% in 2005. It also found that commission expenditure is now “overwhelmingly” used to pay for research services rather than execution-related services. Commissions have declined since the introduction of the new rules, the report found, in line with expectations that greater transparency would exert downward pressure on pricing, but the FSA acknowledged that the trend toward lower commission rates was established before the regime was introduced. Management fees were found to have fallen between 2006 and 2007 for actively managed funds while charges for passively managed funds increased slightly.
Following a 2001 report on institutional investment by Paul now Lord Myners, the treasury minister, the FSA introduced new rules on the use of dealing commissions on 1 January 2006 to increase the transparency of how institutional investors pay for services from brokers.
The prior practice of brokers bundling execution, research and other costs together was considered to create conflicts of interest and leave end-investors paying inflated fees for investment services. The current rules were intended to: limit investment managers’ use of commissions to the purchase of research and execution services; provide better information on costs to end-investors; and encourage the use of payment mechanisms to enable services from brokers to be purchased separately.
The new report, the second post-implementation review based on a performance measurement framework designed by economic consultants Oxera, said benefits were accruing to both retail and wholesale funds, “since retail funds are treated in the same way as wholesale funds”.
Although the FSA said the provision of information to the end investor had improved, it said there was “limited” evidence that disclosures were being used. “However, if the use of disclosures were to increase, this might deliver further benefits,” said the regulator in a statement of conclusions.
The FSA added that further steps to improve the flow of disclosure to fund managers and pension trustees would be achieved “through our usual supervisory actions”.