The Financial Conduct Authority, the U.K.'s watchdog for money managers and other financial services firms, this spring will clarify rules around the spending of client trading commissions.
The FCA wants to “clarify (its) rules that allow investment managers to use dealing commissions — paid from their customers' funds — to acquire execution-related and research goods and services,” according to its website.
Last October, the FCA announced it would be looking at how investment research is paid for and how money managers spend their clients' commissions in the U.K.'s £5.2 trillion ($8.5 trillion) money management industry.
Research by the regulator showed about £500 million of trading commissions were spent on funding corporate access — paying a broker, for example, to provide an introduction to the management of a company in which a money manager wants to invest — in 2012, which Martin Wheatley, CEO of the FCA, said should instead be paid for by the money manager.
Some experts say this pressure will lead to downsizing of analyst teams at investment banks and brokers because they may not bring in the revenue they once did, should the FCA change the way research is paid for.
“If the regulators banned the use of commissions to buy research, we would go to a priced research market,” said Neil Scarth, principal at Frost Consulting in London. “Research spending would go down and fewer (bank and broker) analysts would be employed.”
Whether the FCA goes to the extreme of banning the use of commissions to buy research as part of its efforts to put an end to their use to buy “non-eligible services” such as subscribing to newswires — which experts say is unlikely but should be considered — or opts simply to clarify the situation, the analyst industry will be forced to change in some way.
“Under any circumstances, brokers will have to specialize — the issue has been that, because research is not priced by banks, asset managers have not been specific about what they are paying for,” Mr. Scarth said. “A lot of research that asset managers are receiving they may not have specifically requested and they may not actually use. Highly rated sell-side analysts may become more important and expensive as managers will be able to attribute direct revenue to them in a priced research market.”
The result, Mr. Scarth said, could be more analysts looking for roles elsewhere. But it also would create more costs for the money managers. He said the consulting firm estimates that, globally, money managers spend billions of pounds on research. “The ability to buy external research creates pretty substantial economies of scale for the system — covering all stocks all of the time in-house is expensive and impractical for almost all asset managers. There is no doubt that asset managers will have to spend more time and money on monitoring the commissions that they spend and to make conscious choices about the research that they buy,” he said.