Regulator crackdown in the U.K.

FCA announces a three-month consultation period with investors and asset managers to protect clients against wrongful handling of dealing commissions.

Regulator crackdown in the U.K.

The U.K. Financial Conduct Authority announced Monday it will undergo three months of consultation with investors and asset managers to ensure the client’s best interests are top of mind when handling dealing commissions.

The consultation is in response to a discussion led by FCA CEO Martin Wheatley in October considering wider reforms on dealing commissions to ensure transparency and fairness when executing trades and handling other related services.

"We need to be confident that managers are putting their clients’ value for money, good returns, and transparency at the heart of how they do business,” said Wheatley in a news release. “So, today’s consultation is part of a wider debate on the need to reform the use of the dealing regime, particularly the use of dealing commissions, and how industry practice can be improved now to the benefit of all.”

The proposals for reform are as follows:

  • Clarifying the criteria for research goods and services purchased by investment managers with commissions paid from customer funds.
  • Defining ‘corporate access’ and providing guidance on how investment managers should treat corporate access under dealing commission rules.
  • Guidance on making mixed-use assessments where investment managers purchase bundled brokerage services that contain research and non-research elements, to ensure that only research is paid for with dealing commissions.

The FCA estimates that about $3 trillion was generated in dealing commissions in the U.K. last year, of which $1.5 trillion was spent on research. However, the FCA emphasizes, that it is not known whether the research conducted offered the best value to clients, nor whether investments would have been commissioned if the managers had to pay out of pocket themselves.

"As a forward-looking regulator, we expect firms to exercise judgment to act in the best interest of their clients – seeking to manage their clients’ costs as effectively as they pursue investment returns," added Wheatley.

The FCA will finalize new dealing commission rules in the second quarter of 2014, with an aim to ensure consumers are better protected and the market is operating with integrity.