Asset managers have been told they are rapidly running out of time to finalise approaches to Mifid II rules on dealing commission, leaving fund selectors uncertain of how changes will impact management fees.
With eight months to go until Mifid II regulation triggers an unbundling of research costs from trading fees, fund managers have begun to set out whether they plan to absorb these charges themselves or continue to pass them onto investors.
The likes of First State, M&G and Jupiter have said they will account for the charges on their own balance sheet, while Henderson, Man Group and Amundi are among those to have plumped for the second option.
But specialists have suggested many firms have left it too late to have effective practices in place by January 1 2018.
“The panic will start in about August or September. It won’t be holistically sorted for the start and we will have a soft start,” said Jake Green, partner at law firm Ashurst.
Vicky Sanders, co-founder of research marketplace RSRCHXchange, said: “There has been a realisation that only a finite number of contracts can be negotiated directly. So if the average asset manager uses 100 providers, they won’t be able to agree direct deals with all – or even half. The actual number is closer to a dozen.”
Regulatory uncertainty has been one driver of fund firms’ delay in facing up to the changes. One remaining ambiguity is whether groups will still be able to use commission-sharing agreements – existing arrangements wherein brokers decide how to allocate money between dealing costs and research – to dictate the size of their dedicated research payment pots. European rules have yet to clarify whether the practice will be allowed.
The Mifid II changes will have implications for fund selectors, particularly if brokers prove successful in charging sizeable fees for their research that asset managers then pass on to investors.
Mr Green thought fund buyers will have to settle for temporary arrangements of their own, where estimated costs are set out but are subject to change once deals between fund groups and banks have been settled.
“It will be some kind of interim solution.”
Alistair Haig, a research and teaching fellow in finance at the University of Edinburgh Business School, added: “If these fees aren’t set at the right time, they might go up or later go down. There will be fluctuations. It will be good in the long term, but there will be short-term pain.”
In a consultation paper produced in 2016, the FCA predicted that unbundling research costs could lead to more “cost-efficient and price competitive” services for consumers because portfolio transaction costs will only account for either execution or dealing. However, the overall impact on fees remains unclear.
Julie Patterson, a regulatory specialist at KPMG, said: “[Charging for research costs] could result in lower costs being charged to the fund, but only if the manager does not increase its management charge.”