While the IMA has claimed its eight-point framework represents a near-consensus view of its members as always, it raises several issues that require a closer look.
Once again it feels like the FCA has managed to both split hairs in its scrutiny while failing to be definitive in precisely what it means.
Who pays for what?
Casting a mind back to 2006 when the use of dealing commission first came to the regulator’s attention, it was apparently decided to not define what was meant by ‘research’ because, understandably, the fund managers ought to be able to make that judgement.
Four criteria
There are four criteria that must be met in order for the ‘research’ to be allowed to be paid for by dealing commission:
– "It is capable of adding value to the investment or trading decisions by providing new insights that inform the investment manager when making such decisions about its customers’ portfolios;
– "Whatever form its output takes, represents original thought, in the critical and careful consideration and assessment of new and existing facts, and does not merely repeat or repackage what has been presented before;
– "Has intellectual rigour and does merely state what is commonplace or self-evident;
– "Presents the investment manager with meaningful conclusions after analysis or manipulation of data.”
The IMA raises concerns in several areas, such the reputation of UK plc as a leading financial centre being jeopardised, and shackled innovation in the asset management space as start-ups are unable to negotiate the same terms as their larger counterparts, which will also undoubtedly have access to their own internal research as well.
It highlights the breakdown of costs where they are ‘bundled’ – ie a broker is offering fund managers both execution services but also a level of research. The FCA is suggesting a breakdown of those costs where they are for ‘mixed use’ and seems to be calling on the proportion of what is spent where, on which bit, and by whom.
Providing dealing commissions comprise just one of the many components of the fund management charge, should it be wrapped up in the AMC or the TER, or separated out explicitly?
Clients come first
The same principle could then be applied to any tool the manager has at his disposal in order to do his job properly. Providing the clients’ interests remain at the forefront (implicitly by a more efficient, cost-effective way of running the money), surely that is good enough?
Conflict of interest management lies at the heart of the IMA’s report but once again the strive for transparency and absolute breakdown of costs for each element of a product (fund) or service and the ownership of that element, leads to an overly fragmented industry when it comes to charges which is at odds with the principle of fairness – in the sense of overcomplicating things.
Echoing many regulatory critics, once again financial services is guilty of behaving contrarily to just about every other sector in terms of the level of validation it is required to regarding costs.
The ‘softing’ issue is not a new one, but in the spirit of the RDR, in trying to do right by consumers the industry regulators have called for over-complexity.
“In many cases of the larger managers, they tend to do their own research, which is augmented by the street research,” said one head of research at a wealth management company.
“It’s probably worthwhile looking at this but is it really a case of someone doing something wrong? It doesn’t feel like it. And it might raise concerns over barriers to entry, so I’d keep an eye on that.”
What do you think? We welcome your views – this feels like there may be more to it than meets the eye…
