The UK trade association for asset managers, the Investment Management Association (IMA), released its long-anticipated report on research procurement earlier today. Not surprisingly, the report opposes a ban on the ability to pay for research with client commissions, arguing that a restriction would disadvantage UK asset managers, reduce coverage of smaller capitalization stocks and erect barriers to entry for new asset managers. The IMA urges UK regulators to coordinate any such ban globally, preferably through the International Organization of Securities Commissions (IOSCO).
In an effort to persuade UK regulators that a ban on research commissions is unnecessary, the IMA proposes a set of reforms to current research procurement practices, improving oversight, research budgeting and more transparency. The report also calls on investment banks to more explicitly price bundled research.
Notably absent is any defense of corporate access, which will not be payable with client commissions under proposed UK regulation. The IMA told Reuters that its recommendations did not mention corporate access because the regulators had already made their position clear on the issue.
While the IMA report contains no major revelations, it does signal the intent to reform current research procurement practices. Whether this will be sufficient to deter a ban on research commissions remains to be seen. The comment period for CP 13/17 ends February 25, 2014. The FCA intends to implement CP 13/17 later in the spring of 2014 and expects to release the results of its thematic review after the implementation of the changes proposed in CP 13/17.
The following is an outline of the IMA paper provided courtesy of Frost Consulting. Neil Frost was a member of the advisory panel that provided input to the IMA in the preparation of the report.
Initial Thoughts – IMA White Paper on Commissions
1. Rigorous defense of current system
2. Definitive call for any changes in commission to be in an international context through IOSCO
3. Clearer definition of research including sub-categories (SUBSTANTIVE)
4. Rejects that research producers cannot value research
5. Calls for price transparency from producers – threatens sequential declines in payment if they do not.
6. LACK OF DATA POINTS on relative research pricing. – PARTICULARLY RELATIVE TO EXECUTION
7. Risk of regulation impeding global flow of research
Risks of Banning Commissions
1. Lack of UK competitiveness in asset management.
2. UK research job losses
3. Reduction of asset manager competition through damaging smaller managers
4. Reduction in available research
1. Research budget setting – independent review (not portfolio managers) and internal consistency checks – CFO oversight, end of year audit.
2. That compliance not portfolio management should oversee the process
3. Oversight of the research commission allocation be substantially expanded, to the board level if research expenditures are as large as other expenditures which have to get board approval – increases risks to asset manager boards around commission allocation.
4. Keep appropriate (far better) records of research consumed.
5. Check research budgets against whatever quantitative measures exist.
6. Provide greater and more consistent feedback to research providers as to what products/ services are valued.
1. Asset manager reconciliation of CSA balances.
2. Re-papering of agreements to clarify FX and unused balances