Dealing Commission Discussion: Unbundling

It will be recalled that the FCA published a Policy Statement in May (PS14/7 – see Regulatory Roundup 55) on the use of dealing commission and which contained final revised rules which came into force on 2 June.

Aside from revised rules the Regulator has also carried out a wider review on whether further reform is needed and has now published Discussion Paper DP14/3 – “Discussion on the use of dealing commission regime”.

DP14/3 reveals that UK investment managers pay around £3bn of dealing commission per year to brokers, half of which was spent on research (compared to approximately £250m spent on independent research across Europe in 2011). The FCA’s view is that unbundling research from dealing commissions would be to the benefit of the end user and would also allow independent research providers to compete more effectively against brokers. The FCA also has in mind MiFID II – which is likely to apply in early 2017 – under which portfolio managers will not be permitted to accept any monetary or non-monetary benefits provided by third parties, although ‘minor non-monetary benefits’ will be permissible (see MiFID II, Article 24(8)).

The Discussion Paper includes reference to the FCA’s thematic supervisory work, which took in 17 investment managers and 13 brokers, conducted between last November and February this year. Only two investment managers were found to be operating at the level expected. The FCA views brokers’ unpriced bundling of research and execution services as preventing competition based upon the quality of discrete research services and which also makes it difficult for investment managers in trying to assess the value for money of research. The paper acknowledges that the complexity of the business models of investment banks and their preference to bundle research services may mean structural change for them if transparency is to be achieved.

Firms are encouraged to consider the findings of the thematic work set out chapter 2 of DP14/3 (and if not already done so firms should also consider the revised rules and guidance in COBS 11.6) and review them in the light of their existing practices.

From an EU perspective the dealing commission changes are within MiFID and so would have no bearing on AIFMD and UCITS management activities. With this in mind ESMA has recommended that the European Commission explores the need to harmonise MiFID II changes across these other directives.

The FCA invites comments on DP14/3 by 10 October.

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