New City Initiative calls for dealing commission rethink

The head of boutique asset management think tank New City Initiative (NCI) has warned that smaller firms are being “regulated out of existence” in the face of punishing new EU rules.

In the upcoming Markets in Financial Instruments Directive II (Mifid II), the practice of using dealing commission to pay for a firm’s research is set to be banned, with asset managers forced to foot the costs themselves.

But Dominic Johnson, chief executive of Somerset Capital Management and one of the founders of the NCI, has said the proposal would be “extremely negative” for smaller asset managers.

The European Securities and Markets Authority (ESMA) proposed the ban in its guidance on Mifid II. However, the NCI has come up with a counterproposal.

The think tank has suggested the research costs associated with dealing commissions should be included within the ongoing charges figure (OCF) paid by customers.

Speaking to Investment Adviser, Mr Johnson said including the fees “clearly” within the costs paid by clients would achieve “transparency” on the issue and would be a better way to deal with the problem. He said: “This research leads to better performance so investors would want to pay for it.

“[The ban] will make it very hard for new small firms to set up. They will not be able to get access to research in a cost-efficient way.

“This is not in a customer’s best interest, it is bad for competition and it makes it hard for smaller firms to flourish.”

Firms currently only disclose the level of dealing commission paid in the financial statements for each fund, but the NCI said this was “insufficient” for true transparency.

Instead, the think tank proposed that “dealing commissions should be included in the ongoing charges figure of a fund so that investors can clearly identify the total costs charged against their investment in any year.

“This would allow clients to decide whether these costs are beneficial when compared with the performance outcome or competing [OCF] charges levied by comparable firms.”

The group also called for rules requiring asset managers to disclose the level of dealing commission incurred in the past three years within each fund’s key investor information document (Kiid), as well as a detailed breakdown “showing the largest 10 suppliers and the nature of the research received”.

Mr Johnson added that the inclusion of such a detailed accounting of dealing commission and research within the OCF and Kiid would force asset managers to keep a tight rein on such expenses.

He said: “By including dealing commissions in the ongoing charges figure, we are convinced that investment managers would control research costs effectively.”

The co-founder of the NCI said this would accomplish the general aim of Mifid II – which was to enhance transparency in the asset management industry – without the adverse effects that an outright ban on using dealing commission would entail.

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