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Back in 2006, the UK’s Financial Services Authority introduced rules that limited investment managers’ use of dealing commissions to the purchase of “execution” and “research” services. Earlier this month the FSA published a report on conflicts of interest between asset managers and their customers. The report suggested that conflicts were widespread, with asset managers failing to meet requirements on disclosing commission payments, as well as using customers’ money to purchase research and execution services without checking that they were eligible to be paid for in that way. In particular, the FSA said the buyside houses it spoke with were unable to demonstrate how corporate access – brokers arranging meetings for fund managers with company managers – constituted research or execution services.
The issue of corporate access was brought to the regulator’s attention by a June 2011 report, published by the Centre for the Study of Financial Innovation (CSFI) and commissioned by the European Association of Independent Research Providers (EuroIRP), which concluded that using commissions to pay for corporate access was evidence of continuing market distortions that legislation in the wake of the 2001 Myners Report had sought to eradicate.
“We welcome the FSA’s clear guidance against the use of commissions to pay for the classic corporate access ‘concierge service’ provided by investment banks”, says Peter Allen, co-chairman of EuroIRP. “But the FSA’s action has to be seen within the wider context of sweeping change across the financial services industry in the aftermath of the financial crisis. The regulator is part of that process, but it is incumbent on all of us within financial services to be more efficient and ensure that money is directed to where it’s meant to be going. Of course it would also help if the banks stopped pushing the envelope in such areas and instead showed leadership evidenced by new found probity.”
If fund managers no longer pay for corporate access with clients’ money, this raises the question of how these services will be provided in future. One possibility would be that they go “underground” and are re-bundled with other services. There appears to be agreement, however, that this is unlikely.
Meanwhile, demand for corporate access is likely to remain strong... The IMA says it will work with the FSA and its members to identify what good practice looks like in the areas the regulator has identified. The provision of and payment for corporate access will change, but the service is well-established with fund managers and will not disappear. The FSA’s action could level the playing field for independent research providers, but greater scrutiny of how fund managers spend their clients’ money should benefit all investors.