The Financial Services Authority (FSA) has today published its revised CP176 rules on soft commission and bundled brokerage arrangements.
“Our basic analysis was that a market failure exists in relation to bundled brokerage and soft commision arrangements,” a press release from the FSA stated. The organization believes that the use of such arrangements to pay for goods and services other tan execution lacks crucial transparency. Investment managers often face conflicts of interests in their relationships with brokers as they are not directly accountable to their clients for expenditure on bundled and softened items.
The current lack of transparency make sit difficult for customers to tell whether a managers is acting in their bet interests in situations such as obtaining sufficient value for money on their behalf.
The proposed rules by the FSA include limiting investment managers’ use of dealing commission to the purchase of ‘execution’ and ‘research’ services. Also the FSA believes that investment managers should be required to disclose to their customers details of how many commission payments have been spent and what services have been acquired with them.
The new rules also propose embedding incentives in the commercial relationship between investment managers and brokers to secure value for clients for execution and research spend and, finally, promoting competition between those who produce investment research by removing the regulatory distinction between research services provided by brokers along with execution ( i.e. bundled services) and research services provided by third parties.
“The revised CP176 rules underscore the ground-breaking progress that UK has made in responding to the FSA’s original call for market-led transparency,” says Gareth Jones, managing director, BNY Securities Group, The Bank of New York. “The IMA has been instrumental in formulating the Disclosure Code, which has led to increasing market-wide acceptance of commission sharing agreements.
“We have been at the forefront of the debate since its inception in 2001 and are hopeful that today’s final rules will be instructive to the SEC as they deliberate on this critical issue.”