Following research by Oxford Economic Research Associates (Oxera), the UK regulator, the Financial Services Authority (FSA), has updated the marker on its attitude towards bundled brokerage fees and soft-dollar compensation.
The FSA plans to limit dealing commissions to buying “execution” and “research” services – trades specifically executed for the fund manager and research goods and services used by the fund manager for their own trading benefits. Everything else is to be paid for in cash.
“As well as reducing the types of goods and services that can be purchased through commissions, the new regime requires that fund managers make prior and periodic disclosure to their clients, including disclosure of the use of clients’ commissions,” says the Oxera report, which was released on 24 October. The report does not give an update on the proposed ban of soft-dollar compensation of asset managers for the use of order management systems (OMS) and execution management systems which has been criticised.
After years of co-ordinating efforts on softing with the Securities and Exchange Commission, the FSA has shunned the SEC’s rule allowing OMS and EMS to be traded with soft dollars. When the FSA originally issued guidelines last year it did not clearly prohibit OMS and EMS from soft-dollar eligibility, nor did it differentiate between electronic systems that benefit broker-dealers from those that benefit fund managers.
“The FSA wants to make a distinction between allowing firms to use manual intervention to execute their trades, and electronic means,” says Elizabeth Rae, senior policy adviser on market initiatives for the London-based asset manager trade group Investment Management Association. “The goal of relying on automation is to offer clients efficiency, so the FSA’s decision appears to fly in the face of that.” The soft-dollar debate has continued for nearly eight years, and the FSA has had multiple stances since its initiation of the discussion five years ago. After releasing papers that proposed both extremes of soft commission, the FSA opted for a more relaxed approach last year.
Though the FSA did not say when its next update is expected, Oxera will complete another assessment of the guidelines in 2008. The latest research was commissioned in early 2006, after the prior rules went into affect in January. Three questionnaires were sent to pension funds, fund managers and brokers.
“We acknowledge that industry practices have begun to change and look to further progress as the transparency around the spending of commission improves and information becomes available to fund managers and trustees,” says the FSA’s press release. “We will continue to work closely with the three trade associations – LIBA, IMA and NAPF – to secure our desired outcomes.”