FSA Confirms Plans To Tackle Soft Commissions

by Robin Pilgrim, LawAndTax-News.com, London

11 May 2004

The Financial Services Authority (FSA) confirmed on Friday that it is acting to promote efficiency and transparency in UK securities markets by limiting the scope for soft commissions and bundling in relation to execution services and investment research.

According to the FSA, this regulatory action will be complemented by a market-based initiative led by the Investment Management Association (IMA) to develop an improved system of disclosure that clearly identifies charges for research. These measures will allow investors to make more informed decisions about services charged to fund assets by fund managers, and will help to ensure that investment research and execution services are sourced in the interests of fund investors.

The regulator revealed that it will assess in December whether the industry's work on enhanced transparency and disclosure is on track to achieve the desired outcomes. If it is not then the FSA will consider what further regulatory action is necessary.

Commenting on the proposal, Christina Sinclair, Head of Institutional Business Policy, explained that:

“We have concluded that the softing and bundling of non-execution goods and services are not in the interests of investors. To eliminate the conflicts of interest that currently arise, we will limit the scope of such arrangements to execution services and investment research. Alongside this we are giving the industry space to develop a transparent mechanism for identifying the price of investment research included in commissions."

She continued:

"These measures will together help strengthen fund managers' accountability to their clients. If the industry fails to deliver a high quality and workable solution, we will reconsider the need for stronger regulatory intervention, which might include the rebating proposal set out in our consultation paper last year."

This follows a meeting last week between the FSA's Chief Executive, John Tiner and the the IMA and other industry representatives.

During the meeting, the FSA boss outlined the Authority's proposals, and reaffirmed the expectation that good progress will be made by the end of the year in developing an enhanced disclosure system.

The IMA confirmed their intention to lead work with brokers, fund managers and pension fund trustees to that end. The FSA will also review the governance of retail funds to ensure that all investors are able to take advantage of the new market structure.

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