Regulatory Issues > United Kingdom
FSA Policy On Bundled Brokerage And Soft Commission Arrangements
In 2000, the Chancellor of the Exchequer appointed Paul Myners to carry out a review of institutional investment in the UK. His final report, published in March 2001, proved particularly controversial on one topic: “He concluded that there was an incentive for fund managers to direct business to brokers to obtain additional services, rather than the most favourable trade execution terms for their customers, and that this represented an unacceptable market distortion” (quote CP 176, page 3). The Myners review kick-started a major debate on how fund managers should pay for equity research. As one investor commented: “although only 2 out of the 201 pages in the report address commission payments, commission payments have been the main focus of attention.”
The two reports are shown here:The resulting new regime limits the types of goods and services which a firm may receive in return for paying dealing commissions on customer transactions to third party brokers - the only allowable services are execution and research. In addition the new regime specifies that investment managers provide adequate disclosure of these costs to their clients. The FSA is encouraging members to make use of the industry-led proposals for this disclosure from the IMA, NAPF and LIBA.
The Code develpoed by the NAPF and IMA requires two levels of client disclosure known as Level 1 and Level 2. Level 1 disclosure, provided annually, will describe the investment manager's policies and procedures as regards the management of costs paid on behalf of clients. Level 2 disclosure, provided at least six-monthly, will provide both client-specific and firm-wide information on how commissions paid have been generated/used. Page 13 of the IMA code provides a commission disclosure table showing a split between execution and research. IMA defines execution services as "those services related to trade execution that meet the criteria laid down by the FSA for payment out of commissions" (p 17). However LIBA adds a third category being execution advisory services as distinct from best execution.
The final rules were published in July 2005 and are shown here: FSA Final Rules.
The final consultation document was the March 2005 document entitled PS 05/05: FSA PS 05 05 March 2005
Other Reading
Although two years old, the Deloitte Report, commissioned by the FSA, remains an interesting read: Deloitte Report Re CP 176 May 2004
In October 2006 Oxera produced a report for the FSA as part of the unbundling post-implementation review, which involved a baseline survey in February/March 2006 and another survey in 2007/2008.