The Financial Conduct Authority (FCA) has today published a review of how firms use dealing commission.
The Financial Conduct Authority (FCA) has today published a review of how firms use dealing commission - the charges paid by consumers for executing trades and external research, worth around £3 billion a year. It found too few firms properly assess the value-added and cost of research paid for using client dealing commission.
The review also found that the practice of brokers bundling execution and research services makes it harder for investment managers to assess the value of research. Based on these findings, the FCA has announced its support for proposed European reforms to further separate research from dealing commission, to encourage greater competition and more transparency over the price of research.
Speaking at an FCA conference on dealing commission, FCA chief executive Martin Wheatley said:
“The UK is a global centre for asset management – to keep this position it is crucial that investors are confident that they get a fair deal. There is a strong evidence to suggest the current model of using dealing commission to pay for research reduces transparency and creates a link between research spend and trading volume, without a clear assessment of the value this offers to investors. I want to see a level playing field across Europe to ensure the market delivers the best outcome for investors”.
Following consultation in November 2013, the FCA clarified its rules on dealing commission in May 2014 to make it explicitly clear that firms should only be paying for services directly related to executing a trade or substantive research out of dealing commission.
This review of 17 investment managers and 13 brokers found only two investment managers operating at the level we expect. We are in active discussion with one firm on redress for clients after we found it used dealing commission to pay for market data services in full, despite clear statements that this was not consistent with our rules. All firms should ensure that they have understood and applied the relevant rules.
The review includes a discussion of the potential costs, benefits and competition impacts of potential changes to the relevant European legislation (MiFID II) that could significantly restrict the use of dealing commissions. The FCA will work closely with industry and other regulators to ensure that the new European rules deliver the best outcome for investors.
The FCA has a statutory objective to promote the integrity of the UK financial system and secure appropriate protection for consumers.
Notes for editors
- The FCA’s discussion paper on dealing commission[1], including results of the thematic review.
- Martin Wheatley’s speech[2] from the FCA’s October 2013 asset management conference setting out the debate on dealing commission and the FCA’s rules on dealing commission[3] can be found on the FCA website.
- The FCA reviewed 17 investment managers and 13 brokers between November 2013 and February 2014. It found:
Investment Managers:
- Many of the firms that we visited had made improvements since Nov 2012, which should have resulted in better outcomes for their clients, but only 2 firms were operating at the level we would expect;
- In 11 investment management firms, the amount of research purchased with dealing commission remained linked to the volume of trades carried out as they did not have research budgets or caps on research spend; and
- 1 firm was using dealing commission to pay for market data services in full with no apparent attempt at a mixed use assessment to determine which parts of the services were eligible to be paid for out of dealing commission and which were not.
- Brokers did not explicitly price their research as a distinct service, leading to price opacity in the market. This contributes to investment managers’ difficulties in ensuring they are paying an appropriate amount for research and execution; and
- Brokers had not given adequate consideration to their potential conflicts of interest when arranging corporate access with some being unclear who they were acting for, corporate or investment manager. This was somewhat mitigated by the corporates being aware of the potential conflict
4. New European regulations (Markets in Financial Instruments Directive II – MiFID II) will affect the use of dealing commission. On 22 May 2014 the European Securities and Markets Authority (ESMA) consulted on how these rules will be implemented. Today’s paper outlines some key elements of MiFID II and calls for evidence to inform this work.
5. The FCA has also launched a wider programme of work looking at behaviour in wholesale markets, where poor practices and controls by investment firms can feed through to higher costs for end investors. We have also recently published a call for inputs[4] on our wholesale sector competition review, putting forward suggestions on a number of potential future market studies.
6. On the 1 of April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
7. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure and appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
8.Find out more information about the FCA, as well as how it is different to the PRA.