UK's FSA Mulls Shake-Up Of Relationship Between Fund Managers And Stockbrokers

by Carla Johnson, Investors Offshore.com

08 April 2003

The UK's Financial Services Authority (FSA) announced on Monday that it is planning a dramatic shake-up of the relationship between fund managers and stockbrokers.

Under proposals contained within the FSA consultation document released this week, fund managers will no longer be able to pass costs for stockbroker services other than dealing expenses on to investors without their express agreement, meaning that they will need to negotiate with their clients on how much to pay for extra services, such as research.

According to the FSA:

'At the moment brokers typically provide a range of additional services to fund managers. The main ones are market information technology and investment research. Services are provided under two types of arrangements - 'bundling' and 'softing'.'

'Bundling refers to the provision by brokers of other in-house services, such as research, together with dealing in securities in a single commission charge. 'Softing' is the practice by which a broker agrees to pay for the supply of services from a third party to a fund manager in return for an agreed volume of business at an agreed commission rate.'

'In both cases, the value of the services provided is dependent on how much business the fund manager places with the broker. The costs for these services are included in the commissions which are passed through by fund managers directly as charges to their clients.'

Research conducted on the Financial Services Authority's behalf in 2000 revealed that some £2.3 billion was paid as commission by UK institutional fund managers to UK brokers, and that between £660 and £880 million of that was paid as commission on services other than share dealing.

Speaking on Monday, Gay Huey-Evans, Director of the FSA's Markets and Exchanges Division explained that:

'These proposals are designed to do away with distortions in the market and make fund managers more answerable to their clients. Our analysis suggests changes to the regulatory approach should foster competition and ensure a better overall outcome for investors.'

The consultation period for the FSA proposals ends on August 29.

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