Corporate access is the name for the activity whereby a large broker arranges a conference on a particular sector (such as mining or pharmaceuticals) and invites the major companies in the sector to present to the large investment clients of the broker. Investors get “access” to the “corporate”.
These are regular events and form an important part of a company’s investor relations effort to court new and existing investors. The presentations made by companies are available on the companies’ investor relations websites.
Conferences
But these conferences are about more than a publicly available presentation. They are an event for large investors to get to meet the management in a one-on-one situation. These meetings are arranged during the conference and provide the institutional investor with the opportunity to ask questions and get answers that other investors (including the broker) do not hear. This can provide an edge in the analysis of the company that might help the institutional investor to outperform. This ‘corporate access’ is valued highly by investors and this has been recognised by the broker, who now demands to be remunerated for the costs of arranging it.
The very largest institution might have the clout to demand to see the management at any time without waiting for the sector conference – but for the medium-sized investor, the conference arrangement is an efficient way to get corporate access. It is also convenient for the company to have these meetings during a single event.
The FCA’s consultation is about the issue of paying for corporate access. Apparently, institutions have been paying for it out of client dealing commission that is paid for securities transactions, which is potentially in breach of the dealing commission rules.
The current rules on dealing commission were issued in 2006 after the FSA considered imposing a full unbundling regime. At the time, the FSA was very concerned that institutional investors were paying dealing commissions to brokers for dealing and other services that were “bundled” together.
It is a simple arrangement. The fund manager buys a company’s shares and the broker charges 20 basis points dealing commission. It would have been possible to pay a lower commission, say 10 basis points, just for execution of the trade: this is “execution-only”. But the fund manager pays the higher commission because he wants to receive the broker’s research and (pre-2006) get his data terminal subscriptions (Reuters, Bloomberg) paid for by the broker.
Actually, the fund manager is not himself ‘paying’ since the dealing commission is passed on to the fund manager’s client. So by committing the client to pay 20 basis points dealing commission (rather than 10), the fund manager reduces his own costs at the expense of the client. The dealing commission actually pays for a bundle of services provided by the broker, not just execution of the trade.
The client of the fund manager is in effect paying two sets of charges. First, he pays the annual investment management fee (for example, 0.5 per cent, plus a performance fee), and second, there is an element of dealing commission, which is used to pay for services provided to the fund manager to help him do his job (investment research, Reuters terminals, etc). This arrangement was once explained to the trustee of a major transport industry pension fund, and the train driver trustee commented that it was a bit like going to buy a ticket for a journey, but actually you had to buy two tickets. Because the services are bundled, some fund manager clients are completely unaware of what is really going on.
These arrangements amount to a major conflict of interest between the fund manager and its investment client.
Before 2006, the FSA’s approach was to propose full unbundling. This would have meant that fund managers could pay dealing commission that was for execution only and that the fund manager himself should pay for investment research or other services separately. Naturally, this set all the alarm bells ringing as the numbers are so large it would have meant either putting up the annual management fees significantly (which would not have been popular with clients) or fund managers losing money. The fund manager needs the subsidy that comes when spending clients’ money on dealing commissions.
After the furore about full unbundling, a compromise was reached with the industry whereby the bundle would be restricted to two items: trade execution (which obviously has to be included) and research. A list was introduced into the FSA rules detailing services that could not be covered by dealing commission (including post-trade analytics, price feeds and data services), but this list did not include corporate access. So although it was not on the excluded list, corporate access certainly does not qualify as either transaction execution or research.
The FSA/FCA definition of research requires that it must: add value to investment decisions, represent original thought, have intellectual rigour, and involve the manipulation or analysis of data to reach meaningful conclusions. The current consultation paper rightly points out that corporate access does not tick the research box.
But the 2006 compromise was ultimately a fudge. The conflict of interest was still there and fund managers could continue to get their clients to subsidise their own costs, even if they were making full disclosure to them.
There is clearly a major breach of an existing rule and yet all the FCA proposes is to tinker with its regulations in a way that simply underlines the existing breach. This does not amount to the “wider, more forward-looking reforms” trumpeted in the consultation paper.
The key question is why the FCA is not pursuing a current enforcement action against firms in breach? The consultation paper is silent on enforcement, but the implication of the silence is that past misdemeanours are being pardoned.
Membership
The Investment Management Association has been doing its best to protect its members and in its publication on corporate access (27 March this year) it highlighted reasons why its members interpreted the FSA rules differently. These include the failure of FSA supervisors to challenge payments for corporate access in the past.
The 2006 regime has been clearly demonstrated to have failed and yet what the FCA is doing now amounts to closing its eyes to past breaches and tinkering with its rules in a way that is equivalent to saying: “We really do mean it this time.” The numbers are substantial, involving many retail customers whose investments are managed by fund managers enjoying corporate access at their clients’ expense. Real action is needed, not another fudge. It is time for full unbundling – the industry cannot be relied on to manage the conflict.
Background
Since 2006, corporate access and the money spent on it have grown significantly. The 2013 Thomson Reuters Extel survey shows that, overall, 25 per cent of client commissions were used to pay for corporate access. For UK fund managers, the figure is 21 per cent. It is quite extraordinary that such a survey now includes a box (corporate access) that amounts to a breach of FCA rules.
The FCA has estimated that up to £500m of dealing commission was used to pay for corporate access in 2012 – amounting to a rule breach on a huge scale. The FCA also gave the example of an investment manager that rewarded brokers predominantly on the basis of corporate access, which amounted to £100,000 for each fund manager.”
Andrew Hampton is a former investment banker
