Britain’s Financial Services Authority has published rules aimed at problems associated with soft commissions and bundled brokerage arrangements for consultation.

The FSA says the rules, combined with proposals developed by industry, address the lack of transparency associated with soft commissions and should promote improved management of conflicts of interest.
The proposed rules confirm the FSA’s position that fund managers’ use of commissions should be limited to the purchase of ‘execution’ and ‘research’ services.

Regulators in Canada and the U.S. are looking at this issue, too.

The proposed rules, together with the industry proposals, will:

  • limit investment managers’ use of dealing commission to the purchase of ‘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 incentives to secure value for clients for execution and research spent in the commercial relationship between investment managers and brokers, and;
  • promote a more level playing field in the production of research, whether within investment banks or by third parties.



The paper sets out the services the FSA considers as legitimately falling within the definition of execution and research, which can therefore be paid for from commission under the new regime, and what it views as being non-permitted services. The FSA is proposing that non-permitted services include, amongst other things, computer hardware, seminar fees and travel or entertainment costs.

The FSA does not propose to state whether particular market pricing and information services are permitted but has set guidelines against which all services should be evaluated. The FSA will expect investment managers to apply these principles to determine whether particular goods and services they propose to acquire with commission are permitted services. They must be able to justify this decision to their clients and the FSA if asked.

Along with the new rules, the British asset management industry has come out with proposals of its own to increase transparency and accountability. “The rules, combined with the industry-led proposals to deliver additional disclosure, address the issues of transparency and accountability raised by soft commissions and bundled brokerage arrangements. This should make the market for execution and broker services more efficient and sharpen incentives to provide better value for money to investors,” said Hector Sants, managing director of the FSA’s wholesale business unit.

The FSA’s consultation will close May 31 with final rules being made in July.

To view the fund industry disclosure code and statement of good practice, see:
http://www.investmentuk.org/news/standards/pfdc2.pdf and http://www.liba.org.uk/publications/Final%20Good%20Practice%20Statement_20050324.pdf