The body says some of the practices relating to ‘softing’ – where research and corporate access are paid for out of broker commissions, not out of the asset manager’s own profit and loss account.
The IMA wants its members, regulators, other trade associations and any other stakeholders for views on how the industry should respond to the FSA’s Dear CEO letter on conflicts of interest sent to asset managers last November. Replies are due by 28th February.
The IMA says while the FSApurports to make no changes to existing rules or provide guidance, its Dear CEO letter it places the legitimacy of the purchasing of corporate access through the use of dealing commission under any circumstances into doubt.
The body notes that industry reaction on both the buy-side and the sell-side reflects a view that the regulator has changed, and narrowed, its interpretation of existing rules.
The FSA says its research shows payments for corporate access account for 29 per cent of dealing commission, but the IMA says its members put the figure nearer single figures.
Asset managers have come under criticism for incurring costs such as corporate access and research through more expensive dealing charges, in a way that these costs do not appear in a fund’s AMC or TER, even though these would normally be considered manager costs and not costs of trading.
Last month Corporate Adviser revealed that five of the six biggest funds in the country refuse to disclose how much of their customers’ money had been spent on research costs that did not appear in the AMC or TER but had been paid for out of incurring higher broking costs.
The IMA says it wants an open debate on the issue and wants the asset management community to move to a position where it is seen to be transparent. This will include examining issues relating to payments for research through broker commissions.
The IMA is seeking views and recommendations on several issues, including:-
– Where a broker is involved in corporate access, in some cases it may be acting as agent of the corporate and its management, including those who are, for example, broker clients in an IPO. In other cases the broker may be acting on its own account, on behalf of one or more managers, or acting jointly on behalf of a manager and the corporate. There should be clarity as to the capacity in which the broker is acting.
– A manager should then enquire as to how (if at all) the broker is remunerated for their services in this area. (Although client commission spend may form a part of this remuneration of brokers, there will often be no transparency from the broker as to the actual pricing of the components of bundled services covered by that commission. It can be very unclear what the pricing position is regarding activities around company access, and the negotiation of prices can be difficult.
– Managers need to ensure that they are doing the best that they can in negotiating as competitive commission rates as possible for their clients. Clients must be expected to challenge managers if they feel that commission rates are higher than their expectations. The IMA disclosure codes provide detailed information for clients in this respect.
– Managers would look at three elements:
Clarify the position of the brokers in relation to their capacity and compensation arrangements, for example, by undertaking a communication exercise with them;
Review the process around permitted research services and company access;
Continue to seek to drive best value in terms of commission rates with
Guy Sears, director, institutional at the IMA says: “We are asking what are the impediments to a sensible way for valuing and paying for research. We are not comfortable the way it has panned out is where we should be today.
“I don’t buy the idea that the FCA will have the time or priority to look at softing rules so we will.
“Are there things that at some firms going forward should be paid through the P&L account or AMC going forward? Yes that is possible.
“The IMA expects during 2013 to propose changes to address the engagement issue, and any barriers put up by issuers and their corporate advisers, and also the pricing and unbundling of research. The practical reality is that, in the current operating environment, brokers play a role in facilitating engagement. Asset managers wish to work with the FSA to ensure that the way in which they use broker intermediation to facilitate their engagement with issuers as a part of their research and stewardship activities should meet FSA requirements in their entirety.”