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'A critical period': Martin Wheatley's speech on fund charge conflicts
on Oct 30, 2013 at 11:25
At the time dealing commission was used to fund a broad range of services, such as investment research, market data service licences, phone lines, seminars, external publications and data price feeds.
As a result, in 2006 the FSA introduced a new regime that worked with industry to tackle these shortcomings. The FSA had considered more radical reforms, but as a compromise, the FSA understood an alternative model devised by industry may provide a cost-efficient way of securing the same outcome.
The regime, which is still in place today, is principles based, allowing asset managers to make reasonable judgements when using client commissions.
The rules specify that, in addition to the actual transactional costs linked to execution, commissions can only be used to purchase a narrowly defined range of execution or third party research services. There is also an obligation on asset managers to disclose the use of commissions to their clients.
The FSA committed to keep the regime under review, and to consider the case for further intervention if changes did not address the original problems.
Since 2006, supervisors have increasingly come across evidence that the current regime does not sufficiently enhance transparency and accountability. There are two persistent problems. Firstly, services are being ‘bundled’ together, with eligible and non-eligible services being mixed.
Secondly, when this information is provided back to the client, there is a lack of clarity or adequate transparency around how their commissions have been spent.
Examples of this poor practice include firms allocating significant sums of their Bloomberg and Reuters subscriptions, not all of which could be justified as viable research. Or a firm we looked at that paid nearly double the amount of commission it had paid for research than the year previously, simply because it had traded more year-on-year. The amount of research received, however, had remained relatively the same.
Of most concern is that firms are pushing the definition of ‘research’ by using client commissions to cover non-eligible costs and services.
This includes a significant chunk of clients’ commission being paid for ‘corporate access’ services from investment banks and brokers. We estimate that anything up to £500 million of dealing commission was spent in 2012 to facilitate corporate access.
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