FCA shakes up dealing commissions

Canary Wharf2The Financial Conduct Authority (FCA) has moved to prevent fund managers using dealing commissions to obtain access to senior executives in companies.

Britain’s regulator says investment managers should only use client dealing commission to pay for “substantive” research or costs related to executing trades.

The FCA published a policy statement on forthcoming changes to dealing commission rules today, stating how commissions can be used. Dealing commission is worth approximately £3 billion (€2.2 billion) per year.

Firms that already meet the rules will not need to make significant changes to the way they operate.

Martin Wheatley, FCA chief executive, says: “Investors should be confident that dealing commission is only used to buy execution or research 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 changes on dealing commission come into force on June 2 and are a result of extensive industry consultation, the FCA says.

A principle effect of the rules is to prevent investment managers using dealing commission to pay for access to senior staff at firms they invest in, known as “corporate access”.

The changes also clarify which costs investment managers can pass on to their clients through dealing commission, including where substantive research is bundled together with services that firms cannot pay for using dealing commission.

Past reviews found that controls on how dealing commission is spent could be improved and in 2012 the FCA asked firms to confirm their controls were effective.

The FCA wants investment managers to treat commissions as though the money was their own. CFA Society of the UK carried out a member survey recently of over 500 investment professionals found that 45% disagree with the statement that investment firms manage clients’ dealing commission with as much diligence and care as they would if it was their own money. However, 32% support the claim and 54% of respondents agree that the investment profession’s management of research costs has improved since execution and research costs were unbundled.

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