♦ Regular reviews also needed – at least once a year
♦ Complex calculations needed on bundled services
♦ Only three weeks for investment managers to prepare for new rules
Amelie Snape, Consultant at Bovill, the specialist financial services regulatory consultancy, comments on the FCA’s Policy Statement on dealing commission.
According to Bovill, the Policy Statement means that investment managers now have to undertake a full review of all the goods and services they pay for with dealing commission to ensure that these payments are in-line with the latest rules, which take effect on June 2 2014.
Amelie Snape explains: “Dealing commissions are a big focus for the FCA. The regulator will now be looking for evidence that firms have responded to this policy statement by reviewing all the research they are buying with dealing commission and assessing that it is eligible and valuable to the clients who are paying for it. This will need to be done at a senior level and be well documented.
“If a firm wishes to use dealing commission to pay for goods and services from brokers it must be able to show that it has reviewed the goods and services to ensure they are relevant for its clients and that they are fairly priced.
“The FCA will also expect firms to carry out periodical reviews of what they pay for with dealing commissions on at least an annual basis.”
Complicated analysis needed for bundled services
According to Bovill, the FCA has provided more information on how it expects firms to analyse bundled services, which might include a combination of goods and services that can be paid for with dealing commission and those that cannot.
This includes carrying out a “fact-based analysis” to separate the services. When they are not individually priced by the provider, this includes comparing the individual services to others available individually elsewhere in the market. Investment managers are also encouraged to estimate the amount that their firm would be willing to pay, in good faith, for the service where they cannot pass the cost on to customers.
Amelie Snape adds, “The FCA’s focus on dealing commission is increasing pressure on investment managers to re-assess their practices in this area. Analysing the different value of services that have been bundled together and assessing whether these represent value for money for clients may be very hard to do in practice.”
The Policy Statement makes it clear the firms are not able to use dealing commission to pay for corporate access.
Says Amelie Snape: “As expected, the FCA has made it clear that it doesn’t want firms to use dealing commission to pay for corporate access. Firms will have to be able to show that they have not passed this cost onto their customers."
Next steps for firms
According to Bovill, at the very least firms should:
• Carry out a comprehensive review of what goods and services it currently pays for using dealing commission, and carefully assess these against the new rules. For any non-eligible items, firms should fairly value these and ensure the cost is not passed on to customers.
• Identify bundled goods and services paid for with dealing commission and carry out an exercise to disaggregate each of these.· Select an appropriate methodology for pricing disaggregated non-priced goods and services, complete and document the detail of how each component is priced, and ensure the cost of any non-eligible service is not passed onto the customer.
• Assess any broker voting processes in place and the criteria against which analysts and investment managers vote. If non-eligible items such as corporate access are included, then processes should be updated and communicated.
• Implement periodic compliance monitoring to satisfy themselves that goods and services remain eligible and relevant to the customers who are paying for them.
• Update relevant compliance policies and procedures, as well as operational processes, to ensure these reflect the new rules.
• Negotiate appropriate introducer or arranging fees with brokers where they are providing corporate access.
• Revisit prior and periodic disclosures made to customers to ensure compliant with the rules.