Martin Wheatley, chief executive of the FCA, said the regulator was throwing out the current rules governing fund managers’ use of client money to pay stockbrokers ‘dealing commission’, which can cover a range of services from trading shares to investment tips and research.
He said the FCA was launching an immediate thematic review of the commissions and was set to publish a consultation in November. The regulator is also set to pursue a common European stance on the commissions through negotiating with the EU on updating the Mifid directive.
In an investigation in 2003, previous regulator the FSA discovered that asset managers had been dipping into client money to pay for an array of services such as investment ‘research’, phone lines and price data fees, rather than paying for these services out of their own profits.
This led to a clampdown in 2006 when lists of eligible and ineligible costs for payment out of client capital were drawn up, but at the time the industry successfully lobbied the regulator to make allowances for “reasonable judgements” on what can be paid as commission.
However, in this morning’s speech Mr Wheatley said fresh investigations had exposed continuing abuses and ‘bundling’, under which broker firms receive single payments for a variety of services, “can also disguise overpayments for eligible services”.
Speaking at an asset management regulation conference at London’s Excel Centre, he called time on the era of judgement-based regulation of dealing commission and suggested the future of bundling itself was in doubt.
“Since 2006, supervisors have increasingly come across evidence that the current regime does not sufficiently enhance transparency and accountability,” he said, adding that commission use was also not being made transparent to clients.
“Examples of this poor practice include firms allocating significant sums of their Bloomberg and Reuters subscriptions, not all of which could be justified as viable research.
“Or a firm we looked at that paid nearly double the amount of commission it had paid for research than the year previously, simply because it had traded more year-on-year. The amount of research received, however, had remained relatively the same.”
He also admitted that asset managers had been paying brokers and consultants exorbitant fees in return for access to company chief executives, as revealed by Investment Adviser’s sister title FTfm earlier this year.
“We estimate that anything up to £500m of dealing commission was spent in 2012 to facilitate corporate access,” he said.
“As an example, last year we discovered a firm that was rewarding brokers predominantly based on the corporate access they provided. This averaged out to each individual investment manager paying over £100,000 just to gain access to the management of companies they wanted to invest in.”
“This practice transfers the firm’s costs onto the client, which clearly works against the client’s interests.”
Mr Wheatley said it was acceptable for investors to “engage with the businesses they invest in”, but “asset managers should be using their own funds if they wish to purchase access”.
“We have now reached a point, evidenced by our supervisory work, where we need to think again,” he said.
“The system is not working as intended. Wider reform is now required to address these flaws that cannot simply be addressed by incremental improvements to the existing rules.”
Mr Wheatley added that fund mangement trade body the IMA had already begun an investigation into the issue.
“We consider the IMA’s own review of this market valuable and welcome both the collaborative approach and the consumer orientated position that the IMA has taken,” he said.
