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FCA backs EU dealing commission clampdown

The FCA has backed plans from the European Union to bar investment firms using dealing commission to pay for research.

In a feedback statement issued earlier today, the City watchdog says it would “strongly support” proposals from the European Securities and Markets Authority issued in December.

Under the EU reform proposals, an investment manager will only be able to purchase research if it is paid for either directly by the firm or through a “research payment account” funded by a specific, separate charge to the client.

The FCA says: “We consider that the EU reform proposals to separate portfolio managers’ payments for research from execution arrangements will better align their incentives to control costs and procure research in the best interest of their customers, and will improve competition in the market for research.”

The rules are intended to remove conflicts of interest for portfolio managers generated by including the cost of research with deals with individual brokers.

Rule-makers had been concerned the practice may influence execution decisions, as well as limiting control over costs passed to customers.

The FCA says during the consultation process some respondents raised concerns brokers would simply retain higher execution rates while providing research “free” to portfolio managers. The FCA rejected these concerns.

It says: “We would expect execution rates or spreads to reduce to reflect the removal of any costs of research currently priced into these rates by brokers. We believe that the separation of costs will improve the ability to monitor best execution, and given the existing competition between brokers and venues for execution-only business, we think it is unlikely that firms could maintain higher transaction fees to subsidise other services.”

The regulator was also warned that the reforms would put EU investment managers at a competitive disadvantage versus overseas competitors. However, the FCA argues the changes will create a “more competitive research market” which could “lower costs and improve returns to consumers”.

“We do not support the view that EU portfolio managers may be perceived as less competitive in a global context simply by making research costs a separate, upfront fee,” the regulator says.

The European Commission will now draft legislative proposals for the new rules this year, with support from Esma, as well as the European Parliament and Council.

The rules will be implemented as part of Mifid II, with final delegated acts expected to be adopted by January 2016 and put into law by EU member states by July.

The full Mifid II rules are expected to come into force from 3 January 2017.

At the same time, the FCA expects to publish a consultation on its implementation of Mifid II by late 2015.


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