Asset managers may no longer be able to pass on the multibillion-dollar costs to clients of the research they buy from investment banks, the chief executive officer of the U.K. markets regulator said.
The Financial Conduct Authority is considering forcing global fund managers to pay for research instead of charging customers through trading commissions, Chief Executive Officer Martin Wheatley said in a speech today in London. Investment banks spent $5 billion last year on equity research used by asset managers, according to a report by Frost Consulting & Advisory and Quark Software Inc.
The research is included in trading commissions paid to investment banks by fund managers, with the cost passed on to the customer. The regulator wrote to asset managers this year to say they were failing to control costs and need to regularly review whether services were eligible to be paid for using commissions.
“Of most concern is that firms are pushing the definition of ‘research’ by using client commissions to cover non-eligible costs and services,” Wheatley said.
The FCA will publish the consultation in November and a final decision will be made later. The watchdog is in discussions with European Union officials on implementing rule-changes across the 28-nation bloc on what can be considered commission charges, Wheatley said.
The move would mean fund managers must either pay for the research themselves or invest in creating their own reports. The FCA found examples of “poor practice” of passing on costs like their data terminals to clients, Wheatley said.
“The FCA appears to be one by one dismantling the shoddy and dishonest practices of the U.K. fund management industry,” said Alan Miller, chief investment officer of SCM Private, a fund management firm in London. The ramifications “are wide-ranging. Since the job of research is the key ingredient of what asset managers do, it should be included in the annual management charge rather than as an extra hidden charge.”
Fund managers also spent as much as 500 million pounds ($800 million) last year through commissions to brokers to facilitate access to corporate executives, Wheatley said.
“This practice transfers the firm’s costs onto the client, which clearly works against the client’s interests,” he said.
U.K. fund managers were responsible for 5.4 trillion pounds at the end of 2012, a 6.5 percent increase from the previous year, according to the FCA. Nearly half of their clients in Britain are pension and insurance funds, the watchdog said.
The Investment Management Association, a London-based group representing the fund industry, will release a review on research in the next few months.
The IMA’s objective is to ensure “transparency and accountability to our customers and we will explore all possible avenues to make sure we do just that,” Godfrey said.