Unbundling Commissions

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With Carl James, Global Head of Fixed Income and FX BNP Dealing Services and Managing Director of Dealing Services UK.
On the equity side, brokers have experienced a collapse in margins. Asset managers are now increasingly regulated with the focus on the asset managers explaining how they spend clients’ commissions, and having to justify their research and execution spend.
The Financial Conduct Authority (FCA), in its previous life as the Financial Services Authority (FSA), looked at ‘unbundling’ also known as CP- 176. This was driven by the Myners report that put trading costs under scrutiny. The Financial Services Authority (FSA) undertook a survey in 2000, and found that institutional investors paid brokers a total of £2.3B in execution commission. It was clear from the Myner’s report that most pension schemes had no idea of this cost.
Following this report, commission sharing agreements (CSA) were put in place. The idea behind CSA’s was to separate out what was paid for through execution commissions. Previously execution commissions, which let us not forget are the clients’ monies, were used to pay for a wide variety of third party services, which included research. With the implementation of CSA’s there was an explicit split made between execution costs and research costs. Transaction costs now have more clarity, as they are better understood and this has meant they have fallen.