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Put your warehouse in order

Smaller companies fund managers will have the ability to reduce their transaction costs following a relaxation in rules included in the FSA’s conduct of business rules concerning investment business.

Brokers dealing with direct equity Isas will also receive the additional flexibility to get a better price for clients under the rule change.

The FSA’s revised and simplified rulebook, known as Newcob, has relaxed regulations concerning aggregated orders and the “prompt” allocation of those investment orders. In the past, brokers and managers were able to hang on to orders, for up to seven days under the old Imro rules.

Releasing them at once in order to take advantage of an average price, firms using this practice were able to avoid uneconomic allocations and excessive settlement costs when trading in markets where it is necessary or advantageous to execute big orders over more than one day.

It was not just fund managers that could use this process but private clients accessing direct equities or stock brokers with direct Peps and Isas. Under the Pep and Isa rules, brokers were allowed to hold on to the orders for three days.

When the FSA took over from the various regulators, such as Imro, in 2000, also known as N2, firms were required to execute buy or sell orders “promptly”, meaning within one day for retail customers but five days for intermediate ones. In other words, if the practice was for a retail customer it was essentially not allowed and the same rules applied to managers running retail funds.

The Investment Management Association has consulted its members on the matter over the years and determined that the practice of warehousing has been missed by fund managers, particularly it says with smaller company fund managers who can use the aggregating to greater advantage as it can help when purchasing shares in a somewhat illiquid company.

Under Newcob, the FSA has now decided that the definition of “prompt” is more open to interpretation and therefore enables the practice of warehousing to be used once again for retail customers and in retail funds.

But while one section of Newcob will be giving back managers and brokers some client flexibility, another may be taking it away, due to the FSA’s extension of Mifid rules.

In reporting client information, under existing rules, providers and brokers can amalgamate transactional information and issue it to customers in an agreed format – for instance, a statement can be given every six months or once a quarter.

Under Mifid. there is no such flexibility given for the dispatching of contract notes.

The impact of this is that in situations such as direct equity share schemes and dividend reinvestment schemes – a contract note must be issued for each and every transaction.

As many of the schemes, such as those on offer from some of the big retail houses like HSBC or the Halifax, often involve quite low monthly sums, the costs of transacting such arrangements is about to go up.

The FSA states in its Newcob policy that it sympathises with the difficulties that this rule will have in the UK market but it cannot interfere with the implementation of the EU directive rule.

Noting it has already received a large number of concerns about this particular ruling, the FSA says: “While we are sympathetic to the concerns raised by respondents in relation to the application of the confirmation requirements in these circumstances, we do not have the power to waive or modify the requirements of the directive.”

Guy Sears, deputy chief executive of Apcims, points out that the association believes that the rule change will, in effect, result in millions more pieces of paper or communication being sent to clients.

He notes that the move will make dealing in smaller monthly plans utterly uneconomical, adding that, in some cases, firms do not even have the systems in place to capture the type of information that will be needed to report each and every single transaction and reinvestment.

The one plus side to this is that Ucits funds are exempt from such a requirement so regular savings schemes into a collective fund should be unaffected. What remains unclear, however, is whether or not the term “fund” will include investment trusts and any share schemes within those vehicles. As investment trusts are. in effect. a direct equity, they are also collective schemes, although not Ucits, which is what the rule exempts.

Sears says he cannot see how investment trusts would be excluded from the fund exemption but adds he cannot find where it explicitly states this. The Association of Investment Companies, on the other hand, says it is positive the fund exclusion will extend to investment trusts, with deputy director general Ian Sayers noting investment trusts are not generally within the scope of Mifid.


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