Fund managers still charging end clients for research despite FCA clampdown
Almost three quarters of UK investment firms have taken little or no action to revise the way in which they purchase research using dealing commissions despite the recent clampdown by the Financial Conduct Authority (FCA) on these practices.
Only 21 per-cent of asset managers told the survey by Cordium, the regulatory compliance consultancy, that they had made substantial changes to their policies on purchasing research. The FCA has upped the ante on fund managers offsetting research costs to their investors.
In June 2014, the FCA introduced rules which stated fund managers could only charge underlying clients for research through trading commissions if that research was original and had a meaningful impact on investment decisions.
This inactivity by fund managers comes nearly two years after the Financial Services Authority (FSA), the precursor to the FCA, penned its “Dear CEO” letter to the heads of major asset management houses in London asking them to explain how they dealt with conflicts of interest, with a particular emphasis on the use of client commissions to pay for equity research. Martin Wheatley, CEO at the FCA, has repeatedly criticised asset managers for stretching the definition of what constitutes research and charging these costs to the investors instead of paying for it through the management fee.
“Overall, the results show the need for a greater understanding on the part of the investment industry as the majority of firms surveyed have made little or no change since the FCA’s renewed focus on this area. Despite the FCA’s numerous publications and speeches on this issue, many firms may not have responded,” said Will Morrell, consultant at Cordium, who previously lead the dealing commission review at the FCA.
Alarmingly, 66 per-cent of respondents believed corporate access was a complementary service, while 49 per-cent acknowledged they would pay less for research if it came directly from the company’s profit and loss (P&L). This could spell trouble for brokerage firms or specialist research providers down the line.
“The fact that so many still believe that corporate access is a free service is worrying. I think it’s unlikely that the service is being provided for free and if corporates aren’t paying a retainer to the broker then the logical conclusion is that it is being cross-subsidised by other services. As a rough rule of thumb, it’s safe to assume there is no such thing as a free lunch and firms should be able to evidence to the FCA that they aren’t inadvertently paying for corporate access,” commented Morrell.
Under the Markets in Financial Instruments Directive II (MiFID II), fund managers will be forced to pay for research, access to research analysts, bespoke reports, corporate access and even market data services such as Bloomberg, through their management fee as opposed to dealing commissions. The European Securities and Markets Authority (ESMA) published a consultation on this issue in summer, which went further than the FCA’s proposals.
Any clampdown or enhanced transparency over fees and expenses will be welcomed by the investor community. One pension fund executive, speaking on strict anonymity, complained the fees the scheme paid its managers were extortionate. “The fees are very un-transparent and the costs the investors pay for the maintenance and running of these investment vehicles is astronomical. We employ consultants who attempt to negotiate fees downwards though and they have been effective. However, we welcome the FCA and ESMA’s stance on dealing commissions,” said the executive.