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FCA considers fund firm action in dealing commission probe

FCA considers fund firm action in dealing commission probe

The FCA is set to ramp up scrutiny on asset managers' use of dealing commission in the build up to Mifid II implementation, after it found a majority of firms were still falling short of requirements.

In the regulator's latest instalment of work in enforcing standards around dealing commission, it said investment managers were generally still not assessing value for money with research, meaning it could be forced to take "further action" in future.

After visiting 17 firms to assess the use of dealing commission, the FCA said it found “poor practices” at a majority of the firms.

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“At the extreme end, some continued to use dealing commission to purchase non-permissible items, such as corporate access and market data services, contrary to our rules,” it said.

The watchdog went on to bemoan a lack of improvement from fund groups, despite its attempts to raise standards dating back to the publication of a thematic paper in 2012.

It found that despite a growing number of commission sharing agreements (CSAs) being put in place, the majority of research and transaction payments were still being bundled together.

The FCA added: “In some instances, firms were also unable to demonstrate that research and execution were treated as distinctly separate services.

“A particularly concerning practice saw trading counterparties being selected on the basis that they should be rewarded for research, raising potential issues about the ability to demonstrate best execution.”

As part of its next steps, the FCA warned investment firms it would now begin referring individuals and companies to its supervisory body – particularly in cases where its own rules were being breached.

“Much of the poor practice we’ve highlighted previously is still commonplace. This is concerning considering the majority of the rules on the use of dealing commission have been in place for over a decade,” the FCA said.

“Where we identify breaches of our rules, we will consider further action, including referring firms for further investigation.”

Mifid II rules will force fund firms to separate out research and transaction payments in order to enforce better use of client investments.

The FCA said it would increase its focus on this area in the build up to the January 2018 deadline for implementation of the rules.