U.K. FCA Backs Research Being Split From Commissions

The U.K. Financial Conduct Authority backed European plans to make investment managers pay separately for equity research, instead of wrapping the cost into broker commissions to execute trades.

The FCA, which examined 17 investment managers and 13 brokers, found firms lacked knowledge of the value of the research paid for in dealing commissions, a 3 billion-pound ($5.1 billion) annual cost that’s usually passed on to clients, according to a review published today. The regulator supported the proposed legislative changes contained in Europe’s Markets in Financial Instruments Directive, known as MiFID II.

The FCA told asset managers in October that they were failing to control their costs and needed to review whether services were eligible to be paid for using dealing commissions. Following a consultation, the regulator published guidance in May that said firms should only pay for services directly related to a trade or substantive research out of a trading commission.

“There is a strong evidence to suggest the current model of using dealing commission to pay for research reduces transparency and creates a link between research spend and trading volume,” Martin Wheatley, chief executive officer of the FCA, said in a statement today. “I want to see a level playing field across Europe to ensure the market delivers the best outcome for investors.”

Active Talks

The regulator said that only two of the 17 investment managers it examined were operating at the level it expected. It’s also in active discussions with one firm relating to redress for clients, after it was found to have used dealing commission to pay for market-data services in full.

The Investment Management Association, whose members manage more than 4.5 trillion pounds of assets, today said they had an “open mind” to the possibility of a global market in which dealing commission was no longer used for research.

“We are considering the paper and remain committed in supporting a regime which operates in the best interests of investors,” IMA CEO Daniel Godfrey said.

The profitability of fund managers may be squeezed if the industry is forced to pay for equity research that cost investments banks globally about $5 billion, Frost Consulting & Advisory estimated.

The operating margins of asset managers’ active equity firms would fall to 12.5 percent from 23.5 percent if regulators make the industry pay for research now covered by bank trading commissions, the study showed.

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