The FCA has published Discussion Paper 14/3: Discussion on the use of dealing commission regime: feedback on our thematic supervisory review and policy debate on the market for research (DP14/3).
In DP14/3, the FCA reports on its recent supervisory findings and a series of roundtable and bilateral discussions with stakeholders that have examined how the use of dealing commission, specifically for the purchase of research, currently functions. In addition, the FCA outlines how the existing regulatory framework and market practices in this area might be affected by MiFID II / MiFIR.
The key messages in DP14/3 include:
- the FCA believes that unbundling research from dealing commissions would be the most effective option to address the continued impact of the conflicts of interest created for investment managers by the use of a transaction cost to fund external research. The FCA believes that it would drive more efficient price formation and competition in the supply of research; and
- the recent MiFID II / MiFIR consultation paper by the European Securities and Markets Authority (ESMA) provides that “any research that involves a third party allocating valuable resources to a specific portfolio manager would not constitute a minor non-monetary benefit and could be judged to impair compliance with the portfolio manager’s duty to act in their client’s best interest.” In the FCA’s view, this would effectively mean the ‘unbundling’ of research from dealing commission arrangements on an EU-wide basis, except for the most generic, widely available commentary. The FCA supports this approach and believes that it can bring lasting improvements in the transparency and efficiency of investment management to the benefit of consumers.
The FCA asks firms to consider the findings of its supervisory thematic work which is set out in chapter 3 of DP14/3. Firms should take steps, where necessary, to ensure that their existing practices and systems and controls are adequate to meet the current rules on the use of dealing commission.
The deadline for responses to DP14/3 is 10 October 2014. The FCA intends to provide feedback on DP14/3 in late 2014 or early 2015. This will be timed to follow and provide an update on ESMA’s final advice to the Commission on MiFID II / MiFIR Level 2.
View DP14/3 – Response form, 10 July 2014