U.K. Fund Managers Can’t Pass on Corporate-Access Costs

Asset managers won’t be able to pass on to their clients the cost of paying for access to executives as part of new rules by the U.K. markets regulator to rein in research charges.

Asset managers should only include costs directly related to executing trades or for substantive research as part of their trading commissions, the London-based Financial Conduct Authority said in a statement today.

Research is included in trading commissions paid to investment banks by fund managers, with the cost passed on to the customer. Under the FCA’s new rules, they’ll have to pay for other research themselves or justify why the expenditure should be paid for by their client. The regulator estimates that U.K. trading commissions totaled about 3 billion pounds ($5.1 billion) a year, half of which has been spent research.

“The new rules and other trends in the industry could see fund managers paying three or four times more for research than they do now,” Neil Shah, the head of research at Edison Investment Research, said in an e-mailed statement.

Fund managers spend as much as 500 million pounds a year to facilitate access to corporate executives, FCA Chief Executive Officer Martin Wheatley said last year. He also said firms were pushing the definition of research to cover non-eligible costs, even passing on costs like their data terminals to clients.

No Justification

“None of the investment managers we visited could justify to us how corporate access met the evidential criteria for research under our rules to allow them to pay for it with dealing commissions,” the regulator said in its policy statement today.

In instances where corporate access is bundled with substantive research, like in investor conferences arranged by a broker which involve sessions with company executives, investment firms must make a fair assessment of what charge to pass on to clients, the regulator said.

Firms should also have systems and controls in place to ensure that payments to brokers are justified and only cover execution and substantive research costs, the FCA said.

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