FSA Updates Soft Commission Policy

by Robin Pilgrim, LawAndTax-News.com, London

12 November 2004

The UK's Financial Services Authority (FSA) on Wednesday published a supplementary policy statement setting out its views on 'non-permitted services', 'execution' and 'research' within an investment commission context.

The statement, according to the regulator, is designed to assist the finance industry in continuing its progress towards a market-based solution to the transparency and accountability issues raised by soft and bundled brokerage commissions.

The FSA initially set out its findings on soft and bundled brokerage commissions in a policy statement earlier this year, which concluded that fund managers' use of commission should be limited to the purchase of 'execution' and 'research'. At that time, the FSA committed to clarifying the scope of these terms.

With regard to the term 'execution', the FSA suggested that it should include all services provided by a broker which are demonstrably linked to the arranging and conclusion of a specific transaction, and arise between the point at which the fund manager makes an investment decision and the point at which the transaction is concluded.

The Financial Services Authority went on to reveal that following discussion with the investment industry it has concluded that 'research' embodies the concept of rigorous, 'value-added' analysis, with clear intellectual content that assists fund managers to make investment decisions in relation to their clients' portfolios. The term will be assumed to include original written research, discussions between fund managers and research providers and possibly 'artificial intelligence'.

With regard to the concept of non-permitted services, the FSA announced that its view is that all services currently regarded as being outside the soft commission regime, as well as some of those within it, should not be paid for from commission, as they are not sufficiently connected with particular investment management decisions or transactions.

Examples given by the regulator included: services related to the valuation or performance measurement of portfolios; dedicated telephone lines; subscriptions for publications; most custody services; and travel, accommodation or entertainment costs.

Speaking this week on the release of the supplementary policy statement, Hector Sants, managing director of the FSA's Wholesale Business Unit, announced that:

"In this document we have set out for brokers, fund managers and customers what services may not be paid for from commission and the key characteristics of execution and research. I am confident that this work will aid the industry in the development of a disclosure-based solution, working with the grain of the market and bringing greater transparency."

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