FCA flags industry shortcomings on dealing commission and best execution

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Asset managers are still falling short of FCA expectations over their use of client money to pay for research and brokerage services.

Between 2012 and 2015, the FCA visited 31 investment managers, including wealth managers and asset managers, to look into how they spend dealing commission.

The thematic review in 2012 looked into conflicts of interest among asset management firms, with a subsequent policy statement on the use of dealing commission rules released in 2014.

Today the watchdog revealed most of the 17 firms it visited failed to demonstrate “meaningful improvements in terms of how they spend their customers’ money through their dealing commission arrangements” and were breaching rules that require them to act in the best interests of their clients.

The FCA says: “We identified poor practices at the majority of firms we visited and several could not demonstrate meaningful improvements in terms of how they spend their customers’ money through their dealing commission arrangements.

“At the extreme end, some continued to use dealing commission to purchase non-permissible items, such as corporate access and market data services, contrary to our rules. Where we identify breaches of our rules, we will consider further action, including referring firms for further investigation.”

According to the findings, only a few organisations tried to partially mitigate the risk of indirectly paying for corporate access by paying for it from their own resources.

The FCA was calling on investment firms to take a more rigorous approach to valuing research, which could in turn lead to lower costs, a more efficient use of dealing commission and – ultimately – better returns for investors.

In its consultation paper on Mifid II, published in October, the FCA set out plans to prevent firms from receiving non-monetary benefits from third parties, including research.

To receive research, firms will have to either pay directly from their own resources, or pay from a separate research payment account. Firms must also set a research budget which is not linked to the volume or value of transactions on behalf of clients.

The City watchdog also today published the findings of its 2014 review of ‘best execution’ and payment for order flow.

The regulator stipulates that trading firms should take “all reasonable steps to obtain the best possible result” when executing client orders or placing instructing third parties.

Best execution looks at factors such as price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.

The FCA says investment firms should have a strategy to ensure that all relevant parts of the business are compliant in ensuring best execution, with accountability and co-ordination between the front office and compliance to ensure a robust monitoring framework.

In its latest findings, also published today, the regulator found many firms had not conducted a robust gap analysis since 2014 and much of the poor practice as outlined in its thematic review had still not been addressed.

Best execution on fixed income trading desks looked “less sophisticated” than seen on equity desks, although the regulator recognises the less transparent nature of that asset class.

“All the firms we visited had management information that allowed them to accurately view equity execution costs, however use of these data was inconsistent.

“Some firms could not evidence any improvement to their execution process based on these data and the review of it was largely a ‘tick box’ exercise.”

In some cases compliance staff are not sufficiently empowered to effectively challenge the front office on execution quality, lacking access to data used by the dealing team or not failing to use already-existing data, such as logs of gift or corporate entertainment.

The FCA says this leads to a simple ‘tick box’ exercise where failings were unlikely to be discovered.