OPINION: FCA Picks on Asset Managers 

Terry Flanagan

Asset managers may be feeling that they are being unfairly picked on by the Financial Conduct Authority as the UK regulator said it is will examine the fund charges paid by investors.

The regulator said in its business plan for the coming year that areas it will review include whether the sales practices of pension providers have improved since the 2014 review into annuities sales, how firms are helping consumers make the right choice in relation to the UK Government’s pension reforms and launching a market study on asset management that will examine charges paid by investors and what drives those charges.

Martin Wheatley, chief executive of the FCA, said in a statement: “The Business Plan is set against the backdrop of the most fundamental changes to pension policy we have seen in over a generation. Therefore we will be looking at how the market is working and in particular, how the industry is adapting to this considerable change and what it means for consumers.”

However the 84 pages of the business plan did not contain three words that are greatly exercising the asset management industry – “payment for research”.

In May last year the European Securities and Markets Authority proposed that asset managers should bear the full costs of research and be banned from paying for research out of client commissions under the proposed MiFID II regulations.

In their responses to the Esma consultation paper, asset managers said the measure would put European firms at a disadvantage to US and Asian rivals and force many smaller firms to close. As a result Esma changed its mind and said fund managers will be allowed to either buy research using direct payments out of their own resources or from a separate research payment account which can only be funded by a specific charge to the client. Fund managers breathed a sigh of relief but then the FCA threw a spanner in the works by saying that the Esma proposals are incompatible with the widespread use of commission sharing arrangements.

It may be an old-fashioned concept in the 21st century sharing economy but if you value a service, then why not just pay for it ? Try explaining to someone outside the finance industry why firms that produce good research cannot just charge a fee. For consumers hoping their savings will provide a half-way decent pension, why should they not be allowed to see how much of their contributions are eaten up in costs ?

Fund managers can hardly plead poverty. Morgan Stanley and consultancy Oliver Wyman said this month in their latest Wholesale and Investment Banking Outlook that sell-side revenues have fallen by 20%, or $55bn, since 2006 while over the same time buy-side revenues have increased by 45% or $135bn.

In addition this week FTfm research said fund managers are matching pay levels in investment banking.

There are signs that the regulators will achieve their aim of extra scrutiny on the cost of research to underlying investors. Instinet, the equity execution arm of Nomura Group, is launching a service to allow clients to pay for research in hard cash, despite having a well-established CSA platform. Whether the new service takes off will be dependent on the regulators and their ability to withstand lobbying from asset managers.

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