Britain to crack down on fund manager fees to brokers
By Huw Jones
LONDON (Reuters) - Britain's financial watchdog has proposed banning the country's 5.2 trillion pound ($8.4 trillion) asset management industry from allowing fees paid to brokers for trading to be used to arrange meetings with top company executives.
Asset managers are allowed to use client money to pay a broker commission for executing share trading orders.
The Financial Conduct Authority (FCA) found the commission was also paying for hidden goods and services, leaving clients in the dark over the true cost of trading.
About 500 million pounds' worth of commission was spent in 2012 on "corporate access" or meetings between a fund manager and the chief executives or chief finance officers of companies the fund is thinking of investing in.
Commission was also being used to pay data vendor subscriptions for fund managers using the broker.
The fund managers argue that such goods and services constitute spending on market research, which is allowed under broker commission rules drawn up in 2006.
The watchdog has concluded this definition of research is too broad and on Monday proposed a general ban from the second quarter of 2014 on investment managers allowing commission to cover any goods and services, apart from the cost of executing trading orders.
A limited exemption would allow commissions to buy strictly defined research that fund managers actually use, and they must make adequate disclosures on how commission is spent.
"We need to be confident that managers are putting their clients' value for money, good returns, and transparency at the heart of how they do business," FCA Chief Executive Martin Wheatley said in a statement.
QUICK FIX
Asset managers generated 3 billion pounds in commission for brokers last year, with half spent on research - but it was not clear that all the research bought offered good value for clients, or if the managers would have paid for it from their own funds, the FCA said.
The new rules will make it easier to supervise the use of commission and take enforcement action if necessary, it added.
"The intention is that asset managers either bear the costs themselves or expressly charge their clients, which fits in with the FCA's transparency and competition objectives," said Simon Morris of law firm CMS.
The watchdog said the ban was just a quick fix and that some "inherent flaws" remained in the use of dealing commission and that more forward-looking reforms would be needed.
The change will affect a large proportion of the financial services industry and shows Britain is acting ahead of anticipated new European Union rules, law firm Ashurst said.
Big asset managers don't need to pay for meeting with CEOs as the bosses willingly come to them but smaller funds and brokers may feel the pinch from the proposed ban and disclosure requirements.
"People will still pay for corporate access but the value currently implied will be drastically reduced. Asset managers will have to have a defined policy on how much they are willing to spend on it," said Nicola Higgs, a senior associate at Ashurst.
The draft rules on use of broker commission is part of the FCA's broader scrutiny of the fund management industry, and the outcome of its review will be released in early 2014.
Asset managers are already pre-empting the findings by taking steps to ensure they have systems to deal with conflicts of interests and show how they put customers first.
The sector's trade body, the Investment Management Association, is expected to come out with its own review soon, though no date has been fixed.
(Editing by Pravin Char)
