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FCA could still surpass Mifid II on dealing commission

The FCA could look to go further than the Mifid II directive and ban the use of dealing commission to pay for research altogether.

In its discussion paper , published last week, the FCA said there was “strong evidence” to suggest firms’ current use of dealing commission creates a clear link between research spend and trading volume without assessing  the value to investors.

The paper adds the FCA has the opportunity to surpass proposed Mifid II rules, due to be implemented in 2017.

The Mifid proposals permit paying for generic research but look to ban the use of dealing commission for any form of privileged access to research analysts, including face-to-face meetings or conference calls.

It also bans the use of dealing commission to buy any bespoke reports or analytical models, investor field trips, or corporate access and market data services.

The FCA’s current rules, as confirmed in a November 2013 consultation, make clear firms should only pay for services directly related to executing a trade or substantive research out of dealing commission.

FCA rules have already banned the use of dealing commission to gain face time with company management.

Deals that offer rebates on research to fund houses for putting trades through the brokerage businesses have also been stamped out by the FCA.

But the FCA says it will not impose any stricter regulations before the Mifid II rules are in place in 2017. A spokeswoman says: “The FCA will not change the UK rules on dealing commission ahead of the changes that will be out in place to implement Mifid II. Esma are consulting on how the measures in Mifid II should be implemented.”

The regulator’s latest review of 17 investment managers and 13 brokers found only two investment managers operating within the current rules.

FCA chief executive Martin Wheatley says: “The UK is a global centre for asset management – to keep this position it is crucial 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 to ensure the market delivers the best outcome for investors.”

As part of its latest discussion paper, the regulator last week confirmed it is set to make one asset manager pay redress to clients over improper use of dealing commission.

In February, the Investment Management Association set out recommendations which acknowledged the possible banning of dealing commission to purchase investment research, with fund groups instead paying directly for such services. 

But IMA chief executive Daniel Godfrey also said the existing practice for purchasing investment research also has its benefits and recommends these new measures be assessed and compared against the existing model. He says: “We welcome the FCA providing this update. It provides clarity as to what regime in the FCA’s opinion should exist across the EU by 2017. It also raises questions about wider change.

“Our February report expressed an open mind to the possibility of a global market in which dealing commission was no longer used for research. We are considering the paper and remain committed in supporting a regime which operates in the best interests of investors.”

Charles Stanley head of investment research Ben Yearsley says: “There is value in certain aspects of the use of dealing commission and I am not sure the amount paid by investors would decrease on the basis of any new rules.”

Adviser views


Peter Chadborn, director, Plan Money

“The FCA should have authority to do what it thinks is right for the UK market so if they have identified conflicts of interests, they should be able to act accordingly, whether that means lighter or tighter regulations than Europe. If it acts sooner than 2017, it could be accused of kneejerk reactions and not consulting widely enough. If the Mifid rules are tighter than the current FCA ones, then perhaps there is an argument to allow those rules to come in first and see if they solve the problem before the FCA tightens the screw too far and has to unwind it.”


Simon Webster, managing director, Facts & Figures Charetered Financial Planners

“The fact the FCA says it won’t act until 2017 suggests it does not think dealing commission is as big a problem as Europe does. The other side of this, of course, is that Europe loves to overregulate. Perhaps the FCA is thinking that given the current regulatory complexity it might be a good idea not just to jump straight in with two size 10s causing even more problems.”


Colin Low, managing director, Kingsfleet Wealth

“As always, the more transparency in this community, the better. That way, we as advisers can understand what is happening and be accurate in what we tell our clients.”

Proposed Mifid rules

  • A consultation published by the European Securities and Markets Authority proposes banning the use of dealing commission for any form of privileged access to research analysts, including face-to-face meetings or conference calls
  • It also prohibits the use of dealing commission to buy any bespoke reports or analytical models, investor field trips, or corporate access and market data services
  • The consultation was issued on 22 May and countries have until 1 August to respond. Final Mifid II rules will be implemented on 1 January 2017
  • The proposed rules go further than FCA rules, which came into force in June by banning any form of bespoke research and access to analysts.


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