Martin Wheatley, head of the UK Financial Conduct Authority (FCA), says that conflicts of interest within the asset management sector, such as the use of “soft dollars”, requires regulatory action.
Speaking at a regulatory conference Wednesday, Wheatley, chief executive of the FCA is calling for greater transparency in the asset management sector, in particular in how buy-side firms compensate sell-side dealers. Wheatley says that it is concerned that some asset managers are pushing the definition of ‘research’, which they can charge to the funds they manage, and using clients’ money to cover other sorts of costs and services that should be paid for by the firm, not the funds they manage.
Rules around this issue were introduced in 2006 amid concerns about conflicts within the industry. And, Wheatley says that, since then, regulators “have increasingly come across evidence that the current regime does not sufficiently enhance transparency and accountability.”
He noted that there are two persistent problems: the bundling of services; and, a lack of transparency to clients. “In a nut-shell, this type of outdated bundled charging system and use of dealing commissions to purchase research lacks the transparency that has attracted a global consumer-base, distorts competition, and supports unsustainable business models,” he notes.
As a result, it has concluded that regulatory change is required. He indicated that the FCA will be consulting with asset managers on changes to the existing regulation to deal with these sorts of conflicts and weaknesses in transparency. And, he noted that it will issue a consultation paper in November to clarify the rules on research, and there will be a review that looks at conflicts of interest within the asset management sector.
“We need to be confident that managers are putting their clients’ value for money, good returns, and transparency at the heart of how they do business. Then the discussion is about how best to get there – is evolution enough or do we collectively need to be more revolutionary?” Wheatley said, adding that it will be pursuing this issue with European regulators as well.
The FCA says that its concerns about transparency are shared by the industry, including the trade group, the Investment Management Association (IMA).
And, in response to Wheatley’s announcement of a review of the use of dealing commissions to buy research, IMA chief executive, Daniel Godfrey, said, “The IMA has been conducting a significant review of this market for some months and we expect to be able to report our conclusions early in the new year. Our clear objective is to ensure we deliver the greatest possible value for money, transparency and accountability to our customers and we will explore all possible avenues to make sure we do just that.”