The following is a guest article by Chris Newson, founder of CN Business Consulting Ltd and most recently a Director at Citigroup where he was responsible for research revenue management including research pricing and revenue collection.
Back in the good old days of 2007 (if only we had known at the time!), UK corporate access was very simple. Hector Sants, then CEO of the predecessor to the Financial Conduct Authority (FCA), said at a conference that corporate access was an extension of a brokers’ research services and could be treated as such. Martin Wheatley then arrived and immediately made the cost of research his crusade. The new tough line required ring-fencing corporate access and deeming it outside of research. The main concern for UK regulators was to stop fund managers charging the cost of corporate access to their clients through commissions.
Fast forward 10 years and the world is a very different place. The FCA insisted that MiFID II keep corporate access separate from research (to a wave of indifference from their EU counterparts) because they assumed fund managers would continue to pay for research from commissions. Little did they know that a significant number of fund managers would take the cost of research into their own books, making the split unnecessary. However the MiFID II rules require a broker to charge separately for different services so they have an obligation to charge for research and corporate access separately, even when they are being paid for together. The FCA have spoken at a number of conferences stressing that they expect to see them charged separately.
The separation of research and corporate access is on the whole, artificial. Most corporate access teams sit in the research department (although some are in sales) and they are seen as offering an alternative research service. Moreover, research analysts are essential to corporate access. When a company wants to roadshow, they do not google investment banks and choose one at random. Because research analyst invests a lot of time getting to know a company and its senior management, generating research to demonstrate their expertise — the relationship with a research analyst will be a key determinant in company’s participation in corporate access.
In addition, there are services that don’t fit neatly into either research or corporate access. For example, brokers often make industry experts available to clients. This doesn’t feel like research because the expert is generally not even employed by the broker and usually steers away from investment advice. It isn’t corporate access because it doesn’t usually relate specifically to issuers (a criterion highlighted by the FCA). Although expert access is really a separate category all by itself, in practice brokers tend to close their eyes, pick either research or corporate access and lump it in with them.
Research and corporate access are closely linked and when a fund manager pays for both from their resources, there seems little point in charging separately. Charging separately creates significant extra administration in having to track each item and issue separate invoices or itemize on one invoice. This in turn requires fund managers to reconcile the items with their own records and becomes one more item that needs to be agreed.
Surely this represents a good opportunity for the FCA to push fund managers further down their chosen path? They could say that if fund managers pay from their own resources, they can make one simplified payment for all services provided by sales and research teams. Fund managers using client assets to pay for research would continue to go through the additional administrative burden of segregating them.
The FCA has the chance to demonstrate that they are more interested in fund managers and brokers following the spirit of the rules rather than the letter. The FCA’s rules were designed to ensure fund management clients were not charged for corporate access, and to achieve this, the letter of the rules says that corporate access must be treated as a separate service.
If the FCA continues its current policies it will be a missed opportunity to make life easier for fund managers who have adopted the right spirit. Instead UK fund managers can brace themselves for rules-based, detail-orientated reviews later this year.