"There has been some misplaced comment about the FSA backtracking on our proposals on soft commissions and unbundling. Perhaps I could clarify. We are not. 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. 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. So, in that context, let me explain how we intend to proceed with our proposals on soft commissions and bundled brokerage arrangements.BackgroundWe received much useful feedback on CP176 and there has been widespread acceptance among fund managers and brokers - as well as pension funds, the ultimate clients - that change is desirable. We need to see improved transparency in the way that goods and services are paid for with commissions generated by trading. Clients' funds are used to make these payments, and there is opacity and a lack of accountability in the process.
There is less acceptance on how to effect change. A number of respondents to CP176 have told us that a disclosure-based solution should address the problem and that the solutions we proposed, whilst they would be effective to achieve their aims, could have detrimental consequences in drawing business offshore. In fact, our latest research, commissioned from Deloitte and Touche, suggests that our proposals would be unlikely in themselves to precipitate a mass exodus. We will publish their report along with our own Policy Statement at the end of next month. That Policy Statement will set down clearly the outcomes we are looking for.
One thing very clear from the debate we have sparked and from discussions now under way in the US on the same issue, is that there is a ferment of new ideas and approaches being actively explored in the industry, by major firms as well as trade associations. For example, the Investment Management Association has come forward with an intriguing "comparative disclosure" model that looks a promising possibility to deliver more meaningful information and improved choice for clients.
So 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.
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. For our part, we are happy to do what we can to facilitate and to set out how we will assess the outcome, but the responsibility for the outcome rests with the industry. It is important we are kept up-to-date with the developing work.
Improved transparency, once delivered, should enable institutional investors like the pension funds - with their advisers - to make more informed value-driven decisions with and about their fund manager. We recently said in our Policy Statement to our CP185 consultation that we intend to review the governance of retail funds - authorised unit trusts and OEICS, investment trusts marketed through savings schemes and managed funds of life assurers. We believe this could help to deliver the benefits of enhanced disclosure to private investors. They are unlikely to have the knowledge or market power to engage directly with fund managers on these issues.
We shall be pursuing that governance agenda, in discussion and consultation with all the parties, in parallel with the changes on softing and bundling.
The ball is now very much in the industry's court. If it seems to them that we are breathing down their neck on this issue, then that is because we are."
- The FSA issued CP176 in April 2003.
- In 2001, Paul Myners reviewed institutional investment in the UK for HMT. He concluded that there was an incentive for fund managers to direct business to brokers to obtain additional services, rather than the most favourable trade execution terms for their customers, and that this represented an unacceptable market distortion.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
