By Adrian Fitzpatrick, Head of Dealing, Kames Capital
The FCA paper on commissions is a significant issue. Firstly it will happen as the CEO/CIO’s are now on the hook for the commission spend. Most institutions are looking at their commission budgets, and it will have to be more budget than target. Brokers ahead of target/budget will receive execution only commissions and I suspect this will be done on a rolling basis.
Commissions for research will drop, but execution commissions may increase if we get the Great Rotation from fixed income into equity. It looks like the pot will only get smaller; and that is not necessarily a bad thing. The buy-side will start to look at menu pricing for research and try to quantify the value of that service. They can reverse engineer the same service from pure third party research providers and then apply that number to the bulge bracket’s research. So if the third party research is your number one then you are not going to pay more for it from your other brokers.
Obviously this is not something the bulge bracket firms want, but the report is effectively using the buy-side to unbundle the sell-side to a certain degree. The sell-side may create a separate research service but the worry there is if the market really unbundles then whoever pays the most will receive the platinum product. The bigger houses or largest hedge funds could benefit. You could see a time where research is distributed first to the big payers then distributed over a period of days to the rest of the buyers who pay a lower fee, which has potentially large unintended consequences.
Corporate access is done and the market has to deal with that. I suspect that new access to this product will be created, probably through third parties or separate fee payable services from the sell-side. I also think the research departments of the sell-side will go through the same pain that sales trading has gone through, and will be savaged over the next one to two years.
I also see no reason why the equity market does not go NET and remove a lot of the regulatory burden; ADR’s and GDR’s used to be NET. The sell-side loses money on equities and makes it in opaque NET markets like fixed interest and FX.
The final point is that the UK could be hugely disadvantaged if it is the only market to apply these strictures.