Post implementation review of the new use of dealing commission

The origins of this work on use of dealing commission lie in the 2001 report by Paul Myners which identified problems in asset managers’ use of bundled brokerage and soft commission arrangements. Our subsequent investigation suggested that these created a market failure though their lack of transparency, accountability and the conflicts of interest they created. As a result market controls were weak, meaning that asset managers’ customers did not receive value for money.

We therefore introduced rules on the use of dealing commission on 1 January 2006. This new regime sought to achieve the following outcomes though the FSA Handbook and industry-led disclosure codes:

• investment managers’ use of dealing commission should be limited to the purchase of ‘execution’ and ‘research’;
• investment managers should give their clients better information about the respective costs of execution and research and the overall expenditure on these services;
• investment managers should be encouraged to seek, and brokers to provide, clear payment mechanisms that enable individual services to be purchased separately; and
• to promote a level playing-field in the production of research.
  

At the time we committed ourselves to undertaking a post-implementation review to test whether these outcomes were being delivered. We therefore commissioned Oxera, a firm of economic consultants, to develop a performance measurement framework to evaluate whether the new regime had achieved its aims and the baseline was measured in 2006. The measurement was repeated in 2008 and the report, detailing the analysis and conclusions of these performance measures, is published today.

The Oxera Report

The impact of the new regime for use of dealing commission: post implementation review [PDF]

Annex: Performance indicators and questionnaires [PDF]

Our conclusions

In light of the report’s findings, we conclude that:

• Overall, the performance indicators found that the expected changes were occurring and that the market was moving towards delivering the intended outcomes.
• In particular, the report found that the new regime has clearly delivered benefits to the market. Commission rates have fallen and the new regime has limited the use of dealing commission to the purchase of ‘execution and research’, encouraged greater separation in the purchase of execution and research and improved the provision of information.
• On the retail side, the evidence indicates that the benefits accruing on the wholesale side are being delivered to retail consumers since retail funds are treated in the same way as wholesale funds.
• When we implemented the rules, we anticipated some adverse effects, such as the risk that the new regime might lead to lower liquidity. This may have occurred in some areas but is unlikely to be linked to the new regime.
• While the disclosures were being provided, there was limited evidence that they were being used. However, if the use of disclosures were to increase, this might deliver further benefits.
  

These findings are consistent with the thematic review on the use of dealing commission conducted in 2007/8. So we conclude that the new regime is having the intended effect and moving the market towards the outcomes we sought.

However, it has yet to deliver all the outcomes desired, in particular those deriving from the use of disclosure. Nonetheless, we maintain that disclosure can deliver benefits. As more information on commission becomes available to fund managers and trustees, the use of disclosure should improve; some of the data in this report may help by facilitating the construction of benchmarks.

What happens next

In summary, the evidence we have gathered indicates that as a result of the new regime, the market appears to be delivering the outcomes we sought, although not all have been achieved yet. We have identified areas of concern, in particular the disclosure regime, but believe that our aims here can be achieved through our usual supervisory actions. We will therefore continue to monitor developments in this and related areas.