More Canadian Managers to Adopt CSAs

Terry Flanagan

Canadian asset management firms are bracing for greater transparency requirements as a result of regulations on both sides of the Atlantic.

In Canada, the Client Relationship Model Phase 2 (CRM2) amendments to National Instrument 31-103 will require mutual funds and ETF providers to disclose both their management expense ratio and trade expense ratios. This should boost the usage of commission sharing agreements (CSAs) in 2015, according to Doug Clark, managing director at Investment Technology Group.

“You’re going to see funds marketing themselves by how well they manage their client commissions,” he said. “As a result, we think there’s just going to be a lot more discipline put into the space.”

The U.K.’s Financial Conduct Authority and the European Securities and Markets Authority have issued proposals to either ban or regulate commission sharing arrangements and ‘soft’ dollars, which refer to commissions paid over and above the agreed-upon cost of execution by money managers to brokers. In return for soft dollars, brokers provide research and services used to benefit accounts over which a money manager has investment discretion.

Under Esma’s draft rules for MiFID II, asset managers will be required to provide a rigorous assessment of how much each piece of research will cost, and will have to receive periodic ‘opt-ins’ by their clients of the proposed research budgets. While these requirements are considerably more onerous than current rules, they are not as strict as the FCA’s proposed complete ban on paying for investment research with dealing commissions.

The net result of all of these rule changes should be a greater need for asset managers to determine the value of research they are consuming, and manage the payment for these products, according to Clark.

“We have more and more of the large asset managers, the same as in the States, looking at the European rules, and they’re having to wrestle with how they’re going to manage the assets of their U.K. clients,” he said.

In a report, Clark noted that while it’s unlikely that Canadian regulators will copy European initiatives, the impact of European regulation alone will result in the largest of midsize to large Canadian asset managers having CSA programs in place, or at least on the drawing board, by the end of 2015.

“We have firms that have not talked about CSAs and have kind of laughed at us when we broached the subject of CSAs suddenly trying to get on top of the issue,” said Clark. “We think in 2015, you’re going to see 95% of the bigger asset managers in Canada have some sort of a program up and running for CSA, even if it’s fairly small. All the late players are coming to the party because of the new rules.”

Featured image via selensergen/Dollar Photo Club

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