The U.K.’s Financial Services Authority today published a policy statement which sets out the FSA’s views on what should and shouldn’t be paid for by buy-side firms with “soft dollars” or bundled commissions.
The FSA set out its findings on soft and bundled brokerage commissions in a policy statement earlier this year. This concluded that fund managers’ use of commission should be limited to the purchase of “execution” and “research”, and the FSA committed to clarifying the scope of these terms.
It maintains that all services currently regarded as being outside the soft commission regime, as well as some of those within it, should not be paid for from commission. This is because they are not sufficiently connected with particular investment management decisions or transactions. Examples include: services related to the valuation or performance measurement of portfolios; dedicated telephone lines; subscriptions for publications; most custody services; and travel, accommodation or entertainment costs.
The FSA is defining “execution” as including all services provided by a broker which: are demonstrably linked to the arranging and conclusion of a specific transaction; and, arise between the point at which the fund manager makes an investment decision and the point at which the transaction is concluded.
Execution services would include booking and processing of orders, related costs arising directly from trading and activities which would constitute active order management, i.e. advice on order handling, program trades, etc.
Following discussion with the industry the FSA concluded that “research” embodies the concept of rigorous, “value-added” analysis, with clear intellectual content that assists fund managers to make investment decisions in relation to their clients’ portfolios. Research will include original written research, discussions between fund managers and research providers and possibly “artificial intelligence”. This will not include raw data feeds.
“In this document we have set out for brokers, fund managers and customers what services may not be paid for from commission and the key characteristics of execution and research. I am confident that this work will aid the industry in the development of a disclosure-based solution, working with the grain of the market and bringing greater transparency,” said Hector Sants, managing director of the FSA’s wholesale business unit, in a release.
The U.K. investment industry has committed to provide proposals on making disclosure of these arrangements by the end of 2004. The FSA plans a consultation paper on the issue, and hopes to have final rules in place by next summer.
U.K. regulator announces “soft dollar” policy update
FSA outlines which services may not be paid for from commissions
- By: IE Staff
- November 10, 2004 November 10, 2004
- 10:40