21 November 2012

Graham Bishop's Blog: FSA evens up the playing field between the Davids of independent research providers and the Goliath investment banks

The CSFI Report pointed out that “Following the findings of the 2001 Myners report, which decided that the bundling together of research and trade execution was an “unacceptable market distortion”, the Financial Services Authority introduced new rules at the start of 2006, which limited investment managers’ use of dealing commissions to the purchase of “execution” and “research” services. In practical terms, the mechanism adopted by the industry to implement the new rules has been Commission Sharing Arrangements (CSAs), which are designed to allow firms to choose a broker for execution, and to direct the research portion of the commission to another broker or independent research provider.”

But 'corporate access' is now the biggest distortion in the allocation of research funding – and growing. The CSFI Report found that “Corporate access continues to grow in importance. According to the Thomson Reuters Extel Survey 2012, the proportion of dealing commissions used to pay for corporate access has increased further in 2012 to 29 per cent, compared with 27 per cent in 2011 and 21 per cent in 2010. Also, corporate access is now the largest component of services provided by the sell-side, overtaking trading and execution (28 per cent) and research (26 per cent) for the first time. Among buy-side equity research respondents, 38 per cent ranked corporate access as very important.”

However, in early November, the FSA published a document (Conflicts of interest between asset managers and their customers: identifying and mitigating the risks) and wrote that “Firms were also unable to demonstrate how brokers arranging for access to company management (`corporate access’)… constituted research or execution services".

The FSA letter to CEOs requires them to attest - by 28th February 2013 – that any conflicts of this type have been fixed by then and that they are compliant: “Following an assessment of the firm’s arrangements in light of the Paper’s findings, the board resolved that the firm’s arrangements are sufficient to ensure that the firm manages conflicts of interest effectively and in compliance with FSA rules". This should level the playing field for independent research providers.

NOTE: Graham Bishop is a member of EuroIRP– sponsors of this research.

"FSA takes action on corporate access

The fund management industry is expected to stop paying for corporate access services with dealing commissions after the Financial Services Authority in November published a letter outlining its opinions on the issue. This represents a significant levelling of the playing field for IRPs, which typically are not in a position to provide fund managers with access to senior company management in the same way as sell-side side brokers and investment banks.

Corporate access was brought onto the regulator’s radar following the publication of last year’s CSFI/Euro IRP report “Has independent research come of age?” The report concluded that “use of dealing commissions to pay for corporate access services provided by investment banks is… evidence of continuing market distortions that legislation in the wake of the Myners report sought to eradicate"

Source: CSFI report

© Graham Bishop