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John Greenwood: Unravelling the tangled web of dealing commission

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The FCA will soon make clear how it intends to tackle under-the-bonnet charges within investment funds. The consequences for the debate on a pensions charge cap will be significant; the effects on the way investment banks are paid for the research they generate will be seismic and far-reaching.

The FCA is due to publish its response to CP13/17, its consultation on the use of dealing commission rules, in the coming weeks. The FCA’s work in this area should not be under-estimated, now informing the debate in parliament on the pensions charge cap. It will also determine how many investment bank analysts still have jobs in a few years’ time.

In 2012, FSA spotchecks on UK fund managers found they were far less careful in the way they spent money generated from commissions paid for with clients’ funds than they were with their own money. The FSA found that around £1.5bn of customers’ money is spent by fund managers on research each year without any invoice changing hands. This is not illegal but is unbusinesslike.

A key challenge in unravelling this tangled web, which is the same the world over, is finding a solution that does not put the UK industry at a competitive disadvantage. Yet some argue, with good reason, that the UK’s high principles will be adopted around the world pretty quickly.

The FSA’s 2012 order that CEOs of asset managers must personally sign off that they implemented a ban on the use of commission for corporate access has already altered behaviour around the world. Global asset managers have to manage to the most conservative jurisdiction in which they operate.

For CP13/17, Frost Consulting has identified a spectrum of outcomes, ranging from maintaining the status quo right up to an outright ban on the use of commissions to pay for research. A middle option could mean fund managers fixing a maximum spend on their research service which, once reached, sees them switch to execution-only rates.

The consequences of such an outcome would be intriguing. It would not stop the potential for one fund in a range that no one cares about subsidising another but it would at least stop managers spending more on research simply because the market has gone up.

That figure would presumably be divided by the number of equities being traded by that manager, to give a fag packet figure for overall annual research commission for an investment house.

Whatever the FCA decides to do, there will be fewer people in investment banks creating research that nobody wants, needs or uses. The bigger issue is determining where on the spectrum the cost of increasing transparency and apportioning research costs to particular clients outweighs the actual benefit to them.

John Greenwood is editor of Corporate Adviser

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