Backhanders from funds to brokers for research set for chop
The FCA has said it “strongly supports” proposals by European regulators to ban fund houses from using dealing commission to pay for research - a move which could make funds more expensive.
The UK regulator has today released a Feedback Statement which says it believes the proposal by the European Securities and Markets Authority (Esma) to create a separate charge for portfolio managers’ payments for research “will better align” them with their customers.
In Esma’s December paper, it said the practice by which asset managers receive research from broker firms in exchange for using those brokers to execute trades should be seen as an “inducement”.
Esma suggested the obtaining of research from broker firms should only be considered not an inducement if it is directly paid for by asset managers, either from their own pocket or by raising fees for their investors.
“In the technical advice, Esma proposes that the research payment account and charge should be agreed upfront between the portfolio manager and their client, and be based on a budget set by the firm relating to their external research needs and not linked to trading volume or values,” the FCA said today.
“It also requires the portfolio manager to be responsible for operating the research payment account and managing the allocations made from within their budget.
“Moreover, current commmission sharing agreements (CSA) approaches would seem incompatible with the intention of Esma’s proposals, and specifically the view that there should be no link between execution and research payments.”
The regulator said its preference would be to implement any further changes to the domestic legislation in line with the final reforms announced by Europe.
“Depending on the form and content of the final legislation, we may also need to consider our approach to areas such as the treatment of UCITS and AIFM investment management activities, and whether it is possible and desirable to consider further detail to clarify our approach to implementing new requirements,” the FCA said.
“We will consult further where appropriate.”
The regulator added it would publish a consulation in the final quarter of this year on its implementation of the Markets in Financial Instruments Directive - known as Mifid II.
“We do not envisage any further, separate publications on our dealing commission rules at this stage,” the FCA added.
