Bundled charging for execution and research services by brokers is outdated and lacks transparency, according to Martin Wheatley, chief executive of UK regulator the Financial Conduct Authority (FCA).
Speaking at the FCA’s Asset Management Conference in London today Wheatley said the FCA will launch a consultation and thematic review of the way asset managers pay for and use research.
He said it was vital that asset managers’ research costs were more transparent and that they were more effectively able to manage the way research is used and criticised the way buy-side firms currently pay or corporate access.
“The prevalence of bundled services, combining eligible with non-eligible services, can also disguise overpayments for eligible services,” he said. “This cross-subsidises services that asset managers should pay for from their own funds.”
The FCA has estimated that around £500 million of dealing commission last year was spent on facilitating corporate access, which the FCA said is resulting in firms paying far more than they would if they used their own money.
“This practice transfers the firm’s costs onto the client, which clearly works against the client’s interests. This raises a concern because asset managers do not control these costs with the same rigour as costs they incur directly,” Wheatley explained.
Bundled services are often disguising payments of eligible services, that is those which the FCA deems appropriate to be paid out of client commissions, and cross-subsidises services asset managers should pay for themselves, ultimately supporting unsustainable business models.
Wheatley also called for an end to the link between trading volumes and research costs. In one example, an asset manager saw roughly double the amount of commission it paid going towards research as it had been trading more year-on-year, but the amount of research it received remained the same.
The FCA will soon launch a thematic review, which will follow on from its findings on conflicts of interest published last year. In November, it will launch a consultation paper to seek industry views on how the current regime can be improved, which include defining research and which services are considered eligible to be paid for using client commissions.