The UK’s financial regulator has confirmed that new rules governing dealing commissions and how they can be used to pay for corporate access will be enforced from June 2014 onwards.
The Financial Conduct Authority’s (FCA) new guidelines define corporate access as a service that ‘brings about contact between an investment manager and an issuer’, before going on to directly forbid investment managers from using dealing commissions to pay for the service.
Where contact with issuers might be bundled in with other broker services, the FCA document continues: ‘Only that limited research element… should be paid for out of dealing commissions, not the entirety of the arranging service.’
The market regulator goes on to outline situations – such as at broker-led investor conferences or on field trips – where substantive research might be presented to investment managers. In such instances, reads the document, costs can be passed onto customers only for the relevant bits of the service; it’s up to investment managers to split the provision for substantive research from that for corporate access and ‘make fair assessment of the charge’.
The FCA maintains that situations where corporate access is provided for free still require careful consideration by investment managers, but are permitted provided no costs are passed on to their customers.
Martin Wheatley, the FCA’s chief executive, says he wants investors to be confident dealing commissions are used only to buy services that ‘deliver real value. These changes offer firms a real opportunity to show they put their clients first and strengthen the industry’s reputation for transparency.’
The updated rules were published this morning on the organization’s website, after it sought responses to a consultation paper released in November 2013. The regulator’s guidance does not stray far from the consultation paper’s proposed rule changes, however.
Responses to the shakeup from the investor relations community are largely positive: Michael Hufton, managing director at ingage, describes the policy statement as heralding ‘a new era of transparency and fairness for investment professionals.’
Dealing commissions are currently worth around £3 bn ($5 bn) annually to investment managers, claims the regulator, and the new changes aim to encourage professionals to spend their clients’ money ‘as though it were their own’. Along with this, the FCA advises that customers continue to be given comprehensive information about the risks and costs of any services provided.
‘Moving forward there will be no ambiguity and individual clients will know that their dealing commissions are not being used to purchase access – a practice the FCA estimates cost the industry £500m in 2012,’ Hufton continues, adding that he expects the announcement to ‘transform the way corporates and investors work together’.
Chris Collett, vice president of IR solutions at NASDAQ OMX, suggests that the FCA pulled ‘few surprises’ with the confirmed rule changes. ‘The regulator has made the fact that corporate access on its own cannot be paid for using client commissions de jure’, he explains. ‘Given this, the issue for companies – particularly smaller ones – is how to ensure sufficient access to the UK buy-side.’
