The trade body warned of the risks of anti-competitiveness in terms of the UK's position on the global asset management stage and the hampering of innovation within the UK funds industry.
In response to the FCA’s consultation over dealing commission and how it is being used by investment managers, the IMA this week published its report, ‘The Use of Dealing Commission for the Purchase of Investment Research’.
It has laid out an eight-point plan that looks at both clients and the wider market, which is to be used as a benchmark for assessing and comparing existing and alternative business models.
Unintended consequences
Daniel Godfrey, chief executive of the IMA, said: “For many investment managers research is an integral part of the investment process. It informs their decision-making process and helps them deliver returns for the benefit of clients. This report aims to inform the discussion on the future business model for research to ensure value for money, transparency and accountability.
“There are clearly challenges and conflicts inherent in the current business model and the IMA is open to radical change. But there are also advantages and we should make sure that we are not inadvertently losing something valuable by changing the model without a thorough assessment of all the factors. In particular, we believe that radical change would need to be introduced on an international basis to avoid both arbitrage and damage to the UK’s competitive position.”
Introducing a pure cash-based model is one alternative under consideration.
The IMA’s plan, entitled, ‘The Eight Measures of a Good Regime for Research Payments’, looks at the following client-facing factors: ensuring the regime serves the best interests of clients; investment managers behaving as guardians of their clients’ best interests, including conflict management; that any cost borne by the client should reflect the investment manager’s “honest, fair and professional assessment” that it is in the clients’ best interests; and the any costs relating to research borne by them or their investments should be disclosed in a timely and meaningful fashion.
In terms of market-facing criteria, the IMA said: the research market should be efficient to allow for best value negotiations to take place; the market structure must be broad and not raise barriers to entry; research providers should not discriminate in their supply according to the use of other services, such as execution and allocation; the UK’s paid-for regime should not undermine its competitiveness in asset management and financial services more generally.
Putting clients' best interests first
Godfrey added: “This report does not pretend to provide a conclusive answer, but does provide a strong basis on which all stakeholders, including consumers and providers of research, as well as regulators, can work together to determine what changes would deliver the best outcomes for clients.”
As part of its review of the asset management industry, in November, FCA chief executive Martin Wheatley said: “We need to be confident that managers are putting their clients’ value for money, good returns, and transparency at the heart of how they do business. So today’s consultation is part of a wider debate on the need to reform the use of the dealing regime, particularly the use of dealing commissions, and how industry practice can be improved now to the benefit of all.
"As a forward-looking regulator, we expect firms to exercise judgement to act in the best interest of their clients – seeking to manage their clients’ costs as effectively as they pursue investment returns."
The FCA proposals will primarily consult on clarifying the criteria for research goods and services that can be purchased by investment managers with dealing commission paid from clients' funds.
They will aim to define 'corporate access' and provide guidance on how investment managers should treat corporate access under the use of dealing commission rules.
Finally, guidance will be offered on making mixed-use assessments where investment managers purchase bundled brokerage services that contain both research and non-research elements, to ensure that only research is paid for with dealing commission.
