"UK Regulators Begin the Shake-Up of Asset Managers’ Use of Dealing Commission"

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

On 25 November 2013, the U.K.’s Financial Conduct Authority (the FCA) issued a consultation paper proposing new rules to clarify the circumstances in which U.K. asset managers can currently pay dealing commission (CP13/17). (Dealing commission is sometimes called soft commission.) The new rules, which are expected to be in place in Q2 2014, will apply to all FCA-regulated asset managers operating from a UK place of business. The consultation closes on 25 February 2014.

The consultation is part of a wider FCA initiative to reform the dealing commission regime launched in October 2013 by FCA CEO Martin Wheatley. This effort may lead to more radical changes.

Immediate Proposals

The current consultation proposes changes to the dealing commission regime that the FCA believes can be made relatively quickly.

Currently, U.K. asset managers can use dealing commission to pay for both sell-side brokerage fees and investment research. Dealing commission is normally a fund expense and is typically a bundled cost. The FCA believes that asset managers have “pushed the envelope” and stretched the definition of investment research to include payments to brokers to facilitate access to directors and senior managers of issuers (corporate access). The FCA has estimated that £500m of dealing commission was spent in 2012 to facilitate corporate access.

Therefore, the FCA proposes that only goods or services “directly related to the execution of trades on behalf of the investment manager’s customers”; or which amount “to the provision of substantive research” can be paid for using dealing commission.

Asset managers also will need to explicitly consider their duties under the FCA’s client’s best interest rule when considering whether to pass charges onto their clients. Therefore, asset managers must:

  • not pass on a charge that is greater than the cost charged by the person providing the goods or service; and
  • act honestly, fairly and professionally in accordance with the client’s best interests when they are in a position to negotiate (or dictate) the price of the goods or services to be charged to the client.

Asset managers will have to “unbundle” substantive from nonsubstantive research so as to ensure that only substantive research costs are passed on to the fund or managed account.

Asset managers will be banned from paying for corporate access with dealing commission. In the FCA’s view, corporate access does not amount to investment research because it lacks original thought, critical analysis and evaluation of information or meaningful conclusions. Therefore, the FCA believes that corporate access costs should not be paid out of dealing commission, but can be borne by the asset manager.

Wider Initiative – Possible Future Developments

There are a number of bigger issues in this area that will only be resolved following a wider and longer consultation.

The first issue is whether dealing commission should be unbundled, so that execution costs are separated from investment research costs and disclosed separately to clients. The FCA appears to be suggesting that unbundling could result in asset managers having a greater incentive to reduce investment research costs by only paying for necessary research and seeking to negotiate cheaper pricing. A second, more radical, option would be to prevent asset managers passing on investment research costs to their clients.

If the FCA were to decide that radical reform was necessary, it is likely to first seek agreement from other EU regulators (through the MIFID 2 process) to implement reform across the whole of the EU asset management market. However, in the absence of such agreement, the FCA has indicated that it may decide to proceed alone in the U.K.. The FCA has referred to the U.K.’s RDR reforms, which banned the payment of commission to retail market intermediaries and has indicated that other regulators and the market have moved towards its approach.

However, it is not yet clear that the wider EU market would move towards unbundling dealing commission, if the FCA does decide to proceed alone. There is, therefore, some market concern that FCA action on unbundling without wider EU regulatory agreement could disadvantage the UK asset management industry.

Regardless of what happens over the next year or so it is clear that the spotlight is on asset managers’ use of sell-side research. We expect that regulatory focus on dealing commission will force asset managers to look more closely at the quality and required scope of the sell-side research that they receive.

Download PDF

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!