Of Relevance to:
Investment Managers
As mentioned in the separate article “Best Execution” in this Regulatory Roundup, the FCA recently completed a follow-up review looking at how investment managers oversee their use of dealing commission. In a statement published 3 March 2017 the FCA’s conclusion was that most firms had failed to take on board previously published work.
The statement references Discussion Paper DP14/3 “Discussion on the use of dealing commission regime” – please see Regulatory Roundup 57 for an overview of this paper.
We are informed that the FCA visited 17 investment managers to assess their use of dealing commission arrangements and to see how they had responded to the 2014 Discussion Paper.
The visits included looking at how firms:
- assess whether a research good or service received is substantive
- attribute a price or cost to substantive research if they receive it in return for dealing commission
- record their assessments to demonstrate they’re meeting COBS 11.6.3R (‘Use of dealing commission to purchase goods or services’) and are not spending more of their customers’ money than necessary.
As mentioned above, the majority of visited firms were still falling short of expectations – including some firms continuing their use of dealing commission to purchase non-permissible items in breach of the Handbook.
Research budgets came under the microscope. Budgets were frequently linked to historic research spending levels rather than an assessment of substantive research required. Examples were found where budgets had been exceeded with no satisfactory explanation. The FCA warn that this could be a breach of the client’s best interests rule (COBS 2.1.1). In contrast, some firms had budgets well in excess of research expenditure.
On the positive side, some firms were now covering the cost of research from their own resources and ensuring that commission paid was at genuine execution-only rates.
The FCA advises that they will continue to focus on the use of dealing commission. Where breaches are identified the FCA will consider appropriate action – including more detailed investigations into specific firms, individuals or practices.
