FSA Boss Speaks Out On Soft Commissions

by Robin Pilgrim, LawAndTax-News.com, London

30 March 2004

Speaking at a meeting of the CBI Financial Services Council on Friday, chief executive of the UK's Financial Services Authority (FSA), John Tiner dismissed suggestions that the regulator is back-pedalling with regard to its campaign to clamp down on soft commission payments and bundled brokerage arrangements.

"Our focus is always on the ends not the means and where we are confident that a sensible market-led solution can deliver our target outcome we will work with the grain of the market rather than reach for our rule book," he explained, continuing:

"It is sometimes the case that by opening up issues and asking the hard questions, the market is prompted by the regulator to fix practices which work to the detriment of the users and customers of the market. In these circumstances we will watch market developments like a hawk and if the market fails to deliver we will not hesitate in imposing rules."

Revealing that a number of the respondents to a consultation paper on the issue recommended the implementation of a disclosure-based solution, Mr Tiner announced that:

"We have concluded we should give the industry space to develop and trial a solution based on improved disclosure. However, we see some regulatory change as appropriate to set the right framework. Specifically, we want to discuss the principle – and then to consult on relevant rules – that fund managers' use of clients' commissions should be limited to the purchase of trade execution and of investment research."

"This would apply across the market for execution, to soft commissions as well as to bundled brokerage arrangements. Disclosure will therefore need to separate out the payments for execution from those for research. This will necessitate the emergence of an explicit market price for research, which should help harness the forces in the market, as far as investors are concerned."

He concluded:

"We will revisit this issue in December to see whether the industry's work on enhanced disclosure has progressed to the point where it promises to deliver the desired outcomes. If it has not, we then will need to look again at regulatory intervention. This is a challenging timetable for the industry, which will require an immediate start with co-ordinated work involving fund managers, brokers, the pension funds and their trade bodies."

Recommended