Regulation  

FCA to regulate ‘pay-to-play’ ratings agencies

FCA to regulate ‘pay-to-play’ ratings agencies

The FCA has requested the power to regulate investment consultants after its asset management study raised concerns about conflicts of interest among these businesses.

The regulator raised a concern that gifts and hospitality from asset managers could create conflicts of interest for investment consultants that provide asset manager ratings and recommendation services to investors. 

Questions were also asked about investment consultants providing these services to investors while at the same time providing consultancy services to asset management firms. 

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Specifically, the FCA flagged there were concerns that any revenues investment consultants earned from asset managers could create conflicts of interest. 

Some investment consultants reiterated to the FCA that they have processes in place to ensure asset managers’ gifts, hospitality or revenue from providing services did not affect their advice while others argued the outings and presents they received were “insignificant and declining.”

However the regulator stated it was still concerned receiving rewards was resulting in certain fund houses receiving higher ratings.

Last year FTAdviser revealed the UK’s best known fund scorers were outraged over claims ratings were given on a ‘pay-to-play’ basis.

A 'pay-to-play' basis refers to the practice where funds aren’t rated if the fund house refuses a commercial arrangement with the ratings agency.

Back then Richard Romer-Lee, managing director of Square Mile, branded claims about bias “absurd”, while Morningstar’s director of communications, Tina Gould, said any fees paid by asset managers are “entirely subsequent and separate to the analyst rating”.

FE portfolio manager Oliver Clarke-Williams said his organisation's ratings were “fully independent” and whole of market, and Geoff Mills, director at Rayner Spencer Mills, said, “anyone who suggests there is any bias or favouritism or that the fund group or manager can influence our decision is wrong”.

Defaqto chief executive Zahid Bilgrami said the company's Diamond Ratings are whole of market and not ‘pay-to-play’: "We do not have conflicts as others may have in this space.  The vast majority of our ratings are not paid for."

All of the ratings agencies FTAdviser spoke to commercialise their ratings in some way. 

The FCA’s study also slated investment consultancies' ability to spot top managers.

On average, the regulator found consultants were not able to identify managers that offer better returns to investors however their manager selection process ensured that asset managers meet minimum quality standards and reduces operational risk for investors. 

In a 114-page paper published today (28 June) the regulator reported consultants also do not appear to drive significant price competition between asset managers and they fail to place a lot of weight on manager fees in their ratings, although in some instances they can help investors in negotiations on price. 

Jake Green, regulation partner at law firm Ashurst said some in the industry will find the conclusions drawn by the regulator in this area brutal “but it appears hard to argue with.”