The Investment Management Association (IMA) in London has described the consultation paper published by the UK regulator, the Financial Services Authority (FSA), on UK mutual funds and soft commissions as “baffling.”
In its consultation paper CP05/13 on “Bundled brokerage and soft commission arrangements for retail investment funds,” the FSA addresses the issue of how to ensure that investors in retail funds benefit from its enhanced disclosure regime being introduced for bundled brokerage and soft commissions from 1 January 2006.
The FSA says its overall objective is to ensure that fund managers achieve value for money for any expenditure that is charged to their customers’ portfolios. The aim is to achieve this through increased transparency and accountability – in other words, disclosing expenditure to clients, and so subjecting fund managers to competitive pressure to ensure clients receive best value.
But the FSA says it recognises that the majority of retail investors will have little interest in receiving detailed information on soft commissions since it will be largely meaningless to them or they have limited means of influencing the fund manager’s behaviour even if they do understand it, and are unhappy with it. Accordingly, it has proposed that an “individual or body should act as a representative of retail investors who will consider the new disclosures on investors’ behalf and interact with the manager where necessary.”
The IMA is not impressed. “IMA is disappointed that in its consultation on the reporting of bundled brokerage within retail products, the FSA has not properly taken into account the extensive work undertaken by the IMA in 2004 on the governance of collective investment schemes,” says Julie Patterson, Director – Regulation, Operation and Taxation at the IMA. “We are particularly concerned by the FSA’s suggestion that information on brokerage and commissions should not be made available to the retail investor. IMA believes that investors should have access to the same information as reported to the trustee in order to see where their money is being spent.”
FSA has also made proposals for who would be suitable to carry out the supervisory representative role for each type of fund: for collective investment schemes (CIS), the depositary or trustee; for with-profits funds, the committee or person appointed to review compliance with the Principles and Practices of Financial Management; for investment trusts, the directors of the company, in particular those who are independent of the investment manager; and for unit-linked funds, either the with-profits committee if the company has one, or the appointed actuary, or the independent directors of the company.
“It is also baffling to read that while CIS products are super-equivalent to others in that they have totally independent oversight in the form of trustees, the FSA is proposing that some products will be allowed to report in-house and not make their information public to the end investor,” says Patterson. “IMA questions how this is in the interest of fairness and accountability to investors.”
The FSA published its final rules on softing in Policy Statement 05/9: Bundled brokerage and soft commission arrangements – Feedback on CP05/5 and final rules. The FSA’s new rules will apply from January 2006 to any arrangement under which a fund manager receives goods or services from a third party, such as a broker, in return for passing the third party’s charges on to its own customers – typically in the cost of dealing commission.