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Our work on bundled brokerage and soft commissions seeks to improve the management of conflicts of interest inherent in these arrangements. So we introduced new rules in July 2005 which came into effect on 1 January 2006 (with limited transitionals until July 2006). Our rules set the framework for implementing an industry-led solution to improve the accountability of fund managers through:
- limiting investment managers' use of dealing commission to buying 'execution' and 'research' services;
- requiring investment managers to disclose to their customers details of how these commission payments have been spent and what services have been acquired with them;
- embedding in the commercial relationship between investment managers and brokers incentives to secure value for clients for execution and research spend; and
- promoting a more level playing field in the production of research, whether within investment banks or by third parties.
Our work and the industry solution remain of interest to firms (fund managers and brokers), consumers and regulators in the UK, in the EU and other international jurisdictions.
We said in our paper CP05/5 that we would develop measures to test whether our rules and the industry solution were delivering our desired outcomes. To help with this, we employed Oxford Economic Research Associates (Oxera), a firm of economic consultants, supported by Alan Line, an experienced industry practitioner, to develop the approach, determine a set of indicators and establish a baseline for future comparison.
Oxera has submitted its report, which we publish today along with this update. The detailed and data-intensive report:
- identifies and describes a comprehensive and robust suite of performance indicators which will allow the expected impact of the new regime to be measured;
- sets out a stable methodology and an assessment of the quality and usefulness of each of the indicators;
- provides an initial 'baseline' snapshot of practices for the use of commission.
This is an important milestone in our post-implementation review. It demonstrates our commitment to performance evaluation - a key aspect of our response to the Better Regulation Agenda. We would like to thank those firms who participated in Oxera's work as well as IMA, LIBA and NAPF for their support and input. We are satisfied that we now have a suitable performance management framework of high quality that will enable us, over time, to assess the effectiveness of the industry-led solution.
The work is essentially methodological at this stage. The report is not a detailed assessment of firms' behaviour or an evaluation of the effectiveness of our policy. These assessments will follow a further round of data-gathering and analysis which we have planned for 2008.
However, the report provides some evidence of current industry practice. We note that firms are not using commission to pay for prohibited goods and services and that fund managers are beginning to separate discussions on purchasing research from discussions on buying execution. But we do not yet see all the out-turns we are looking for. Our expectations are that:
- Fund managers obtain from brokers the transparent information they need to make good decisions, and justify the basis of their decision making with engaged and informed pension fund trustees i.e. 'what did we get you for your money?'
- Brokers find ways to price research independent of the volume of trading. In a world in which even the most esoteric and complex instruments can be priced as a matter of daily business, this must be possible.
- Trustees make meaningful and effective use of the information to scrutinise the actions of fund managers and hold the managers accountable to justify how commission payments have been spent and what services have been acquired.
In our view, pension fund consultants, as expert intermediaries, also have an important role to play. In advising their clients, they can help them understand the information provided to them. Comparative information, delivered to clients in a clear and timely way, could enable them to engage in meaningful dialogue with their fund managers.
We acknowledge that industry practices have begun to change and look to further progress as the transparency around the spending of commission improves and information becomes available to fund managers and trustees. We will continue to work closely with the three trade associations – LIBA, IMA and NAPF – to secure our desired outcomes.
Oxera report
Soft commissions and bundled brokerage services: post implementation review [PDF]
