The UK’s Financial Services Authority has issued a report which provides an early look at the impact of its new regime for bundled brokerage and soft-dollar commission arrangements.

The FSA says that its work on bundled brokerage and soft commissions seeks to improve the management of conflicts of interest inherent in these arrangements. It introduced new rules in July 2005 which came into effect on January 1, which: limit investment managers’ use of dealing commission to buying ‘execution’ and ‘research’ services; require investment managers to disclose to their customers details of how these commission payments have been spent and what services have been acquired with them; embed in the commercial relationship between investment managers and brokers incentives to secure value for clients for execution and research spend; and, promote a more level playing field in the production of research, whether within investment banks or by third parties.

To help measure the effect of its rules it hired Oxford Economic Research Associates (Oxera), a firm of economic consultants, supported by Alan Line, an experienced industry practitioner, to develop the approach, determine a set of indicators and establish a baseline for future comparison.

Oxera has submitted its report, which: identifies and describes a comprehensive and robust suite of performance indicators which will allow the expected impact of the new regime to be measured; sets out a stable methodology and an assessment of the quality and usefulness of each of the indicators; and, provides an initial ‘baseline’ snapshot of practices for the use of commission.

The FSA says that the work is essentially methodological at this stage. The report is not a detailed assessment of firms’ behaviour or an evaluation of the effectiveness of the policy. These assessments are planned for 2008.

However, the report provides some evidence of current industry practice. “We note that firms are not using commission to pay for prohibited goods and services and that fund managers are beginning to separate discussions on purchasing research from discussions on buying execution,” it says. “But we do not yet see all the out-turns we are looking for.”

“Our expectations are that: fund managers obtain from brokers the transparent information they need to make good decisions, and justify the basis of their decision making with engaged and informed pension fund trustees; brokers find ways to price research independent of the volume of trading; and, trustees make meaningful and effective use of the information to scrutinize the actions of fund managers and hold the managers accountable to justify how commission payments have been spent and what services have been acquired,” it reports.

“In our view, pension fund consultants, as expert intermediaries, also have an important role to play. In advising their clients, they can help them understand the information provided to them. Comparative information, delivered to clients in a clear and timely way, could enable them to engage in meaningful dialogue with their fund managers,” the FSA adds.

“We acknowledge that industry practices have begun to change and look to further progress as the transparency around the spending of commission improves and information becomes available to fund managers and trustees,” it says.