CSAs and the FCA
With Clive Adamson, Director of Supervision, Financial Conduct Authority.
How have the new clarifications been received by the industry?
In 2013, the FCA set out its vision for the UK’s asset management sector – to achieve world-leading standards in terms of governance, transparency and accountability. This marks a clear change from the regulation of the past, to a regulator that expects firms to put consumers’ interests at the heart of their business.
To get there, we’ve proposed a number of changes to the current regime, including clearer rules on the use of client dealing commission. There is broad consensus that the way firms use dealing commission could and should be improved across the industry. In fact, when we asked asset managers and investors to name the most important issue facing the sector, dealing commission was highlighted as the key issue.
Since launching our consultation in November 2013, I’ve been impressed with the positive and constructive dialogue we’ve had with over 130 firms across the industry –both on our specific proposals and our vision for the future of the sector.
We’ve also engaged with key trade bodies including the IMA and AFME, and welcome their contribution to the debate. There is clear evidence that some firms are moving things forward, exercising greater scrutiny over how research commission is spent, setting clear budgets and switching to execution only commission rates to manage costs.
However, we’ve also seen asset managers using bundled commission rates for research and execution, with clients effectively in the dark about how much is spent on research, or what value it provides. In a world where transparency and integrity are key to maintaining the UK’s competitive edge, this simply isn’t good enough.
With newly agreed European legislation likely to further limit the use of commissions, I applaud the efforts of those who have moved ahead of the curve. My expectation is that all firms should be able to demonstrate that they are as prudent in their use of client dealing commission as they are with their own money.
What are the key intended consequences of the new comments?
Managing over £5 trillion of assets, the sector is vital to the UK economy. With hubs in London, Edinburgh and Manchester, the sector employs over 29,000 people and affects millions of everyday savers. There is no doubt that UK asset managers are among the most respected in global markets. But it is also clear that some firms do not take their responsibility to their clients as seriously as they should, particularly in their use of client commissions.
We have engaged with firms to discuss our expectations and have proposed new rules to address our concerns, particularly around the use of dealing commission. But we’ve also listened carefully to their concerns, around the importance of a level playing field with the rest of the world.
We will consider the impact of recently agreed reforms to European regulation under the latest Markets in Financial Instruments Directive (MiFID II), which may limit the ability to obtain research linked to dealing commissions across the EU from late 2016 or early 2017.
We will continue to engage with regulators in the US and Asia on the issue of dealing commissions, and play a leading role in the International Organisation of Securities Commission’s (IOSCO) work to strengthen and harmonise global standards.
Does unbundling need more regulatory action, or is the industry moving in this direction anyway?
I want to ensure that markets work well, and consumers are at the heart of firms’ business practices. When it comes to dealing commission, clients should expect that research purchased on their behalf offers clear value for money.
However, this often isn’t the case. We’ve seen that research commission payments are still often influenced by trading volume and where asset managers direct their trades, even if a broker’s research is not highly rated or even used by the manager – this simply isn’t good enough.
Where brokers bundle research and execution costs together, asset managers are often unaware of how much each specific element costs, making it almost impossible to assess a ‘fair’ price for research or justify this cost to their end clients. We have looked at the use of dealing commission in banks, brokers and a range of asset management firms, and independent research providers.
Early findings show that some firms are starting to address some of the key issues. But, banks and brokers struggle to cost research and asset management firms struggle to put a value on the research services they receive.
We have seen cases where the value of the research bears little relation to the commission paid by asset managers, with clients in the dark about the benefit they receive. We have sought views from the industry on how this could be addressed – including, but not limited or committing to, unbundling. We will consider all the feedback from the consultation and findings from our review before finalising new rules later this year.
By continuing to work with UK firms and international regulators we can secure the future of a world-leading sector, and drive up global standards of integrity and transparency.