Last week, the IMA and other stakeholders responded to the FCA’s consultation on payments for investment research. The consultation marks an important development of the regulatory rulebook, reflecting an evolution in the regulator’s views on the subject.
However, in addition to the consultation, the IMA has undertaken a broader and extensive evaluation of its own. Working with our members as well as an advisory panel of independent experts and engaging with other stakeholders, we have reviewed current practice and considered alternative models to inform the broader debate.
Our aim has been to deliver the best value for money, transparency and accountability for our clients. To achieve that, we set out to ensure that all stakeholders are able to look at the current market and alternative models objectively, so that clear-headed decisions about the future can be made.
Our report on the Use of Dealing Commissions for the Payment of Investment Research outlines the benefits and challenges of the current model and describes how investment managers already go to great lengths to ensure fairness in their processes.
Nevertheless, the report makes recommendations, drawn from best practice identified in the industry, to improve governance around the research procurement process.
Two examples of such best practice are i) the way managers set budgets for total research spend and ii) the way they poll their portfolio managers to determine how to allocate that budget to different providers based on value received.
In addition, we have identified further actions for the IMA, the most immediate being to identify the simplest way of disclosing to customers precisely what research costs they have incurred.
Our report then looks at alternative models, such as a cash market, and poses some questions. Three crucial issues are: whether alternative models could support the current quality and quantity of research into SMEs; whether they may raise barriers to entry for smaller firms; and whether a UK-only move would put us at a competitive disadvantage in a global trading environment.
The report identifies eight measures that can be used to test models for research payment and compare one against another and against the current model. They allow an objective assessment to be made.
The IMA is entirely open-minded about change. The eight measures will enable everyone to be sure that the right path is chosen.
Many fund managers use external research to make informed decisions about how best to invest their clients’ money, so it can be a very important element of the investment management process. Of course, as in every area where investment managers spend clients’ money, we have to place an absolute focus on value for money and client outcomes.
There is no doubt that all stakeholders share the same objectives on this issue. We now know how to achieve them.
Daniel Godfrey is chief executive of the Investment Management Association