The FCA’s Marc Teasdale (Head of the UK Listing Authority, FCA) delivered a speech entitled Investor engagement in a changing regulatory landscape at the Investor Relations Society Conference in London on 23 June 2015.

Here are some extracts regarding the FCA’s stance on Corporate Access:

“Back in 2012, an FSA supervisory review of conflicts of interest in the asset management sector uncovered the increasing use of dealing commissions to pay for this access. When we looked at this issue in detail, we had concerns that using this transaction cost mechanism to pay for access favoured firms generating the highest execution commissions with a broker, so potentially those trading more frequently, rather than the best long-term investors for the issuer.
We also found that amounts paid for meetings through dealing commission – which of course are costs the investment manager passes on to its clients in addition to management fees –  were often much higher than similar services offered by non-broker third parties. We were also clear that the service provided did not meet our criteria for research that can be acquired with dealing commission.

We therefore clarified in May last year that dealing commission cannot be used to pay for corporate access. It is important to stress here that we were not banning corporate access itself, as we recognise that engagement between issuers and investors can be an important component of effective investor stewardship.

Investment managers can still pay for corporate access directly.  But by removing the link with dealing commissions, we think this process, and the costs it involves, will be both more transparent and less impacted by potentially competing incentives. Since clarifying our rules, we have seen firms taking steps to better manage costs and conflicts of interest in this area, as well as innovation to facilitate more direct access between investors and issuers.”

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“Our policy analysis and response on this subject, being closely informed by the results of this review, supported the principle of further separating the acquisition of research by investment managers from the dealing commission mechanism. In our view this would produce a number of positive outcomes including:

• the reform of market practices which are currently subject to inherent conflicts of interest
• greater transparency over the use of investors’ funds, which in turn should lead to increased accountability in the use of those funds – both for research, and when assessing the costs of executing trades
• and the creation of a more level playing field in the market for the provision of research, allowing a greater range of market participants to provide offerings more closely matched to the needs of clients

Of course, the debate in relation to the connection between research and dealing commission has now very much moved to the European stage, due to the development of proposals under MIFID II.

ESMA provided its final advice to the European Commission in December 2014 on detailed proposals to support the new MIFID II Directive, including in the area of research and inducements. Under ESMA’s final proposals, an investment manager can purchase research provided it is paid for either directly by the firm out of its own resources, or through a ‘research payment account’ funded by a specific, separate charge to their client, which is agreed and disclosed upfront. This charge must be based on a research budget set by the client, and cannot be linked to execution volumes or value.

We anticipate that the Commission is likely to adopt the proposals by the summer, which will then be subject to formal scrutiny by the Parliament and Council. We will then need to put the final proposals into our domestic legislation and rules, and we hope to consult formally on this by the end of the year.

Whilst the nature of research that can be paid for via the new ‘research payment account’, and so charged to clients, is likely to depend on the final Commission text or potentially future ESMA guidelines, our view is that corporate access will remain a service that should be paid for directly by the investment manager.

We remain supportive of these EU proposals, as we believe they would significantly improve the accountability of investment managers over their procurement and use of external research on behalf of their customers, leading to better controls of costs in the sector. This is not about cutting research spending or undermining EU asset managers’ competitiveness, but rather about ensuring investment managers buy the right research, at the right price, and are open and transparent with their customers on the costs they will charge on to them.

We think the proposed reforms will lead to a more efficient allocation of resources toward research that adds the most value to asset managers’ investment decisions. This should create a clear opportunity for research from more specialised providers, including in the coverage of SMEs.  Unbundling fees and services by brokers will enable proper pricing and competition in the research market, which should result in better products and services from a more diverse array of providers than under the current model.”

Link to the full speech: https://www.fca.org.uk/news/investor-engagement-in-changing-regulatory-landscape

ESMA Unveils New Rules for Research – In mid-December ESMA (European Securities and Markets Authority) issued the long-anticipated final draft of its new regulatory framework, the Markets in Financial Instruments Directive II (MiFID II).

Institutional Investor magazine provided an update on January 15, 2015 on how MiFID II might handle payments for research and Corporate Access.

Some extracts from the piece:

Specifically, ESMA calls on the sell side to separate research payments from execution fees. For the buy side, research budgets must be established in advance and made plain to clients, with each agreeing to its share of the expense before the budget is implemented.

“That will be good for the ultimate investor, but it’s probably not good over the long haul for the big sell-side firms.”
The bulge brackets’ losses, however, could be independent providers’ gains. Michael Mayhew, chairman of Integrity Research Associates: “If I’m paying this large sell-side firm $1 million for research, and that same amount will get me ten different independent firms’ research, I’m probably going to have to reconsider my budget allocations. European asset managers will likely start reducing their dependence on the large sell-side firms and increasing their reliance on independent research.”

The U.K. regulator has already banned using commissions to pay for Corporate Access, judging management introductions to be outside the realm of substantive, proprietary research. In many ways, the MiFID II draft surpasses the FCA’s strictures.
“ESMA goes further in respect of saying the buy side must have a separate payment account for all research and advisory payments, with budget approval via clients, and even clearer separation from any trading commission spending,” Kelly explains. “ESMA is also more explicit in the need for transparent pricing of research services.”

The FCA requires “hard dollars for organizing and logistics of a road show, say, but permits commissions for the analysis and reports from an analyst that go alongside it.” ESMA’s proposed regulations, however, refers to certain “minor nonmonetary benefits” that the sell side can provide without separate billing, such as conferences and seminars. “This means ESMA is saying that parts of what the FCA would define as corporate access are okay to use commissions to pay for — or at least that is how I read it,” he says. “In this regard, ESMA is going less far, as it were, than the FCA, although personally I think it less likely the FCA will change its stance on corporate access.”

The real devil will be in the details to come, for the draft doesn’t tell market participants how to implement its directives. An open hearing is scheduled for February 19 in Paris, and public comments are welcome through March 2. Then, ESMA will finalize its recommendations and send them to the European Commission for approval before year-end. The new regulations will take effect at the start of 2017.

For the full article click here.

On May 8, 2014 the UK’s financial regulator, the FCA published its decision confirming that investment managers can no longer use commissions to pay brokers for corporate access. These changes will take effect on June 2, 2014.

The final rules are in the document below – go to page 14 for the specific discussion on Corporate Access: