The UK’s Financial Services Authority’s (FSA) proposals for soft commissions and bundling will radically change the UK’s securities trading landscape. Worse, although the changes will benefit investors, they could harm the UK as a financial centre because of a lack of regulatory alignment with other major financial centres. The UK brokerage industry in particular could lose revenues of up to 615 million annually. Or so claims a new report released by Celent Communications.
The report, entitled Changing Regulations for Bundling and Soft Commissions in the UK & US, looks at the United Kingdom Financial Services Authority’s (FSA) investigations of bundling and soft commissions in the UK asset management and brokerage businesses. Celent predicts that the FSA’s consequent proposals could effect far-reaching changes in the economics and competitiveness of the UK financial services market and that, if these new regulations, or similar market pressures, spread to the US and other markets, financial services firms there would need to adapt to a new set of rules with equally broad consequences.
Celent says the FSA’s proposals are well-intentioned and serve their purpose of protecting investor interests. They oblige fund managers to change how they charge their clients for goods and services that are currently paid for with trading commissions. But, according to the report, investors will benefit from the FSA proposals at the expense of UK brokerage firms. While 174 million could be returned to UK investors, UK brokers could lose up to 615 million, or 27% of UK commissions. Worse still, in the short term, fund managers will be forced to provide greater cost transparency than their international competition. This transparency could set a new model for fund managers globally as large institutional investors take interest in the new regulations.
Celent says that in the US and other countries, financial regulators are unlikely to follow the UK in eliminating soft commissions and mandating full transparency for bundled services. Instead, regulators are likely either to require increased supervision or to do nothing, encouraging UK financial services firms to consider moving their operations abroad, with implications for the country’s standing as a global financial center.
Celent adds that independent research providers and other vendors that receive payments from soft commissions will suffer under the new regulations. Fund managers will be forced to weigh the value of all research, both bundled and independent, as a cost from their management fees. Large brokerage firms are likely to have an easier time as research can be seen as free marketing material, while bundling trading commissions with IPO access will still be permitted. Independents, however, will have to make their case to a much more cost-conscious audience.
“The UK Financial Services Authority is benefiting the world’s investors but may be damaging their own financial services industry,” says Octavio Marenzi, Celent’s managing director and co-author of the report.
“The economic misalignments created by bundling and soft commissions are real, but by going it alone, the FSA may inadvertently damage a domestic industry already struggling with a longstanding bear market.”