Back in July of last year the FCA released a Discussion Paper (DP14/3) on the use of dealing commission regime – see Regulatory Roundup 57.The paper included findings from thematic supervisory work which took in 17 investment managers and 13 brokers.
A key aspect was the view that unbundling research from dealing commission (according to the Discussion Paper UK investment managers pay around £3bn of dealing commission per year to brokers, half of which was spent on research) would be of benefit to the end user and would allow independent research providers to compete more effectively against brokers. Comments on DP14/3 were invited by 10 October.
The Regulator has now published a Feedback Statement (FS15/1) in respect of the comments received.
Some respondents favoured the current regime and expressed concerns that investment firms would be not be able, or willing, to absorb the costs of external research nor pass on such costs to the end-user but would instead reduce spending on research which would possibly lead to a loss of performance. However the FCA remains of the view that the current regime requires further reform with the full separation of the receipt of research from execution, with such reform leading to a potential increase in the number of suppliers of research.
It may be recalled that MiFID 2 (see Article 24(8)) expands upon the current MiFIDregime surrounding the payment of inducements to, or by, a third person. Subsequent ESMA Technical Advice (2014/1569) recommends that investment firms providing portfolio management (or other investment or ancillary services) to clients canreceive investment research by third parties but only if:
- it is paid for by the recipient firm out of its own resources; or
- payment is made from a separate research payment account controlled by the firm funded by a specific research charge to the client
Where the research payment account is the chosen route then the specific research charge must be based upon a research budget set by the firm (and agreed with the client) and must notbe linked to volumeor value of transactions.It is the view of the FCA that the costs of research can be allocated across several research payment accounts on a pro rata basis where more than one client portfolio has benefited from the consumption of that research by an investment manager. As might be suspected this is only a summary and firms are encouraged to read both DP14/3 and section 2.15 of the ESMA Technical Advice for further details.
With this in mind the FCA will not be making any immediate changes to the current rules on the use of dealing commission (COBS 11.6) which, in any event, were overhauled in June last year – see Regulatory Roundup 55 – but instead will implement changes in line with the final reforms under MiFID 2. The FCA intends to publish a consultation paper on the implementation of MiFID 2, including inducements requirements, by late Q4 2015.
Although MiFID 2 does not apply until 3 January 2017, firms should review their current practices regarding commissions and research now and consider whether any changes may be required in order to be in line with MiFID 2 (the FCA reminds us that commission sharing arrangements “would seem incompatible with the intention of ESMA’s proposals”), albeit that the EC is still considering the ESMA Technical Advice.