On March 3, the UK Financial Conduct Authority (FCA) published a Press Release summarizing how firms have been failing to meet expectations on their use of dealing commission, based on a review of 31 investment managers between 2012 and 2015.

Particular issues identified include:

  • research budgets—several firms did not limit their research spending to their budget, with no satisfactory explanation as to why;
  • research polls and voting—a number of firms operated a research poll where analysts and portfolio managers allocated votes that generated research payments based on percentages of the total money/funding available for research, rather than specified monetary amounts; such that they were unable to assess value for money and could not demonstrate they were paying research providers appropriately using their clients’ funds;
  • systems, controls and record keeping—arrangements to demonstrate that only “substantive” research is paid for using dealing commission were generally poor or missing; and
  • conflicts of interest—the majority of firms continued to treat the receipt of corporate access from brokers as a free provision. When these firms also operated limited controls and record keeping over research expenditure, they are exposed to the risk that corporate access or other non-permissible services might still influence the allocation of dealing commission expenditure. These findings suggest that this potential conflict and inducement risk is not being identified, monitored or managed effectively.

Due to the FCA’s findings and the implementation of the revised Markets in Financial Instruments Directive (MiFID II), the FCA will continue to focus on the use of dealing commission. The FCA states that firms are expected to scrutinize this area in order to see a reduction in the dealing commission they spend on research and to help enhance the attractiveness of the UK investment management sector. Where the FCA identifies breaches of its rules or principles, it will consider appropriate action, including more detailed investigations into specific firms, individuals or practices.

The Press Release is available here.