Opinion  

Sesame fine should prompt sobering introspection

Rory Maguire

Rory Maguire

Sesame deserves its fine, now what about the providers?

As an owner of a service provider, this headline stopped me in my tracks. To be clear, we are not providers to Sesame, but we do provide fund research to the industry and our model is analagous enough for it to cause some sobering introspection.

The FCA appeared to have one main concern: the conflict of interest of being paid by a product provider to be on a list that would ultimately guide investment decision-making.

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Fund raters are paid by product providers in large part and we have fund lists that guide investment decision making. Is there a mirror to be held up here?

A business model paradox sits at the heart of our business. We seemingly cannot charge our end clients much or anything for the service we provide if we wish to be commercially viable.

This is similar with the sell-side brokerages, credit rating agencies, and even the financial press. In each case a service is delivered to Paul, often free or discounted and paid for by Peter.

These models, subsidised by interested providers, surely chip away at provider objectivity. Each business has to find their own ways to manage the conflict and ensure impartiality.

For our own fund ratings business, there is no longer a pay-to-play fee model. Now product providers buy a licence to use a rating in marketing. This appears to allow us to have it both ways: removing conflicts, but enabling us to generate revenue from fund managers.

But does it? I can’t get away from the obvious point that the rater is being paid by the ratee.

Yet, invoicing fund managers for marketing rights is a highly defensible practice. A business like ours spends lots of resource and time on producing a single rating, surely we would not just give it away free to fund managers if they gain a large marketing advantage?

But are we not biased if our largest fee paying clients are the product providers on our fund lists? This represents a fascinating paradox.

We could of course be paid by our clients, not the product providers. This seems most obvious and best, but because many users now get ratings for free new market entrants have a very high barrier to entry if they want to bill the end user.

In FT article in January, Paul Taylor, Fitch Ratings chief executive: “Wouldn’t it be nice if the investors paid for it... that’s pretty obvious; it’s not that complex. The reality is that you wouldn’t have a ratings industry if that was the case.”

Perhaps a middle ground would be where we could be paid equally by each manager and a number that is small, so it would not come between us and rating a fund negatively. It would also enable small managers to afford the rating.