UK regulators are changing the face of the research industry. Here are two related articles: the latest news on regulatory actions and an insightful commentary from a UK based broker.
FCA to Release Review Results
The UK Financial Conduct Authority (FCA) gave notice that it will publish its long-awaited ‘thematic review’ of commission usage on July 10th. We don’t expect major surprises, but the review results will set the tone for the FCA’s negotiations with European regulators on MiFID II.
From November 2013 to February 2014, the FCA conducted a supervisory review examining both asset managers and sell-side brokers to examine current market practices and business models linked to the use of dealing commissions. Because the final policy statement on the use of dealing commissions was more stringent than the draft version, we inferred that the review hardened the FCA’s position.
The FCA will hold a meeting with selected industry representatives when the review results are published to outline the thematic findings and “set out our current thinking on the way forward”. Save the date.
Dealing Commission Reform Vital to Transparency
The following is a guest commentary from Nicholas Dray, Manager of Independent Research & Commission Management at Marex Spectron, a London-based broker which introduces independent research to asset managers.
The way that firms treat dealing commissions and ensure transparency in the reporting of research costs will change significantly following a recent policy statement by the UK Financial Conduct Authority (FCA).
On May 8, the FCA published its policy statement on the use of dealing commissions which clarified its definition of what could be considered ‘substantive’ research and consequently eligible to be paid for via trading commissions. The regulator’s plan is to reduce conflicts of interest inherent in the bundled research and execution model and ensure the best value possible is achieved for investors. Central to this is the regulator’s aim that investment managers seek to control the costs passed on to their customers with as much rigour as they pursue investment returns.
The policy statement reiterated their stance that corporate access cannot be funded from dealing commissions, while bundled services and mixed-use assessments are subject to guidance and while judgements by firms are likely to make different assessments of the value and price of eligible services, the onus will fall on investment managers to demonstrate that the judgements were made with the best interests of clients at the forefront of the decision.
Investment management houses are now obligated to produce a clear research policy which will form part of their marketing material. The changes are incorporated in amended Conduct of Business Sourcebook (COBS) requirements pertaining to the use of dealing commission (COBS 11.6) and came into effect on June 2nd.
Marex Spectron’s Independent Research & Commission Management team recently hosted a breakfast seminar which focused on the changes to research valuation and treatment of dealing commissions. Attended by over 25 buy-side firms, the seminar allowed interested firms to participate in a wide-ranging discussion on the implications of the FCA’s policy statement prior to the imminent implementation of the new regime.
Speakers included Neil Scarth from Frost Consulting, a consultancy focused on equity commission unbundling and related market structure/regulatory change, , and Peter Allen, Managing Director of Lombard Street Research who spoke in his capacity as Co-Chair of Euro IRP, an industry association for Independent Research Providers (IRPs).
Scarth highlighted the need for investment managers to place a value on the research they pay for via commission while noting that the FCA accepts that the same research can be worth different amounts to different funds. He sees the key requirements on investment managers now include the need to 1) decide on which research products and services will be used, 2) determine whether they meet the FCA’s substantive guidelines, 3) develop a research budgeting and valuation process and document it and, finally, 4) ensure that accurate records of all these processes are kept as evidence of the judgement-based obligations now imposed on managers.
In our view, the FCA’s findings have been drawn within the context of the objectives of MiFID II, where the underlying theme is improved transparency and fairer treatment of clients. While we remain confident that a ban on research commissions for the procurement of research remains the FCA’s ‘nuclear’ option, we are aware that a Thematic Review on Competition in the Research Market will be released later this year [now scheduled for 10th July, ed.] – the review of the use of dealing commissions is not over.
Marex Spectron believes that the policy statement will lead to further take-up of CSA models by the buy-side as they seek to demonstrate transparency in their research spending. Rewarding research providers who provide a substantive research service with competitive pricing will make them more attractive to investment managers who will be looking to demonstrate sound judgement in the research services they take.
Central to this concept is the ability to accurately and transparently manage all dealing commissions, a service that the team at Marex Spectron have offered for many years. Recently, we have enhanced our CSA offering by offering a market-leading Commission Management platform to our clients in conjunction with our execution services. The platform is a fully-integrated online portal which allows clients to easily and transparently manage their dealing commissions across all their panel brokers via one sophisticated interface.
Marex Spectron sees the benefits of increased transparency in pricing and that buy-side houses who adopt will add value to their clients. We see this as an opportunity for Independent Research to continue to steal market share from the bulge-bracket. The continued pressures on research budgets will force Investment Managers to look outside the traditional avenues for ideas. Further pressure on research departments within the sell-side will probably result in further reductions in both headcount and coverage.
Marex Spectron is one of the world’s largest privately held brokers of financial instruments in the commodities sector and a leader in facilitating trade in physical energy products. It also offers brooking services covering a broad range of financial products. Marex Spectron’s Independent Research & Commission Management Desk specialises in introducing IRPs to the buy-side on a case-by-case basis. Introductions are made only after ensuring IRPs are of the highest quality and of complete relevance. As well as the introductory service, Marex Spectron manages Research relationships on behalf of the buy-side, including all administrative aspects such as fee negotiations, invoicing, renewals and service T&Cs. Marex Spectron also focuses on analysing the ongoing regulatory research framework and the changes affecting the research industry in general, particularly in light of the recent FCA’s review on dealing commissions.