FACING UP TO THE ELEPHANT IN THE ROOM – THE END OF COMMISSION PAYMENTS FOR RESEARCH
Author: Rebecca Healey, TABB Group. The FCA outlined its plan to ensure the UK asset management industry is fair, transparent and competitive, including a rigorous review of the use of client commissions. How research is provided by the sell side, quantified by the industry and paid for by the buy side will require a radical rethink that has the potential to deliver greater clarity and enhanced value to the underlying investor – if we are prepared to address the elephants in the room.
Martin Wheatley, CEO of the UK’s Financial Services Authority, clearly outlined his intentions on Wednesday when he announced that the FCA will conduct a rigorous review of the use of client commissions to pay for research. While the debate about how client commissions can be used has been a long and contentious argument going back to the Myners Report of 2003 (CP176 document), it would appear that this time, definitive change isunderway.
The FCA is right – there are inherent flaws in the current process that need to be addressed. While many asset management firms are actively taking steps to address how client commissions are used – enabling them to achieve best execution as well as gain access to the best research – there is still room for improvement from many.
The Divorce Between Research and Execution
As we highlighted last year (see: “The Long-Awaited Divorce: European Research and Execution Go Their Separate Ways”), the industry has remained in gridlock.UK brokers are believed to have resisted the move toward the full unbundling of commissions out of fear that fund managers would no longer be willing to pay them for research. While there has been a growing movement to distance the execution decision from the research decision, how does the industry establish what research is worth? Should asset managers simply use their own money to buy external research for an agreed price? Would that finally allow pure, independent research providers to gain a foothold? Some would argue that already is taking place – look at the meteoric rise of new research firms such as Redburn, Autonomous and Monument. (Ironically, these independent research providers might also find themselves the subject of consolidation.)