FCA clarifies dealing commission rules
The Financial Conduct Authority (FCA) is proceeding with its proposals to clarify the dealing commission rules, according to a regulatory update from law firm Cordium.
The regulator envisages that the amendments will improve industry practice for the “benefit of all”, whilst ensuring that investment managers seek to control the costs passed on to their customers with as much rigour as they pursue investment returns.
The key changes, which the FCA does not view as being significant, clarify the existing COBS 11.6 rules and come into effect on 2 June 2014. In summary, the rules:
• Clarify that client dealing commission should only be used to pay for a good or service that is directly related to executing trades or amounts to the provision of “substantive” research;
• Define corporate access and prohibit the use of dealing commissions to pay for such; and
• Provide new guidance (COBS 11.6.8A G) on valuing unpriced goods and services and making mixed-use assessments. For example in instances where an investment manager receives bundled services containing both elements that can be paid for with dealing commissions and others which cannot.
Various themes were highlighted in the responses received to the consultation paper, which included requests for further clarification as to the criteria which relates to having “reasonable grounds” under Rule COBS 11.6.3R. This now states that managers should have reasonable grounds to be satisfied that the goods or services will assist the manager, whilst COBS 11.6.5E features clarification on the criteria relating to the meaning of “substantive research” in the form of a list of conditions which must be met. The FCA does not consider these changes to represent an alteration in the burden of proof but rather a clarification of the existing rules.
The FCA is maintaining its position that Corporate Access is not substantive research and has taken steps to explain its expectations in instances where firms receive Corporate Access as part of a bundled service (including the provision of substantive research).
Finally, the regulator has improved and clarified the drafting of its final guidance on making mixed-use assessments. The FCA views mixed-use assessments as equally applicable to non-priced, bundled goods and services and has supplemented the wording included under COBS 11.6.8AG in order to make this view explicit.
Cordium says firms should review the FCA’s finalised changes and update their internal policies and procedures accordingly. Although the proposals clarify existing expectations under the rules, the FCA envisages that they may drive behavioural change by encouraging investment managers to improve controls over their use of commissions which may result in a reduction in costs passed to customer’s funds, whilst improving transparency. This is a key area of concern for the FCA and changes to the rules confirm the regulator's view that the industry as a whole has failed to apply the rules appropriately.
Furthermore, firms are expected to have sufficient systems, controls and record keeping arrangements in place to ensure that they not only meet but are able to demonstrate compliance with the FCA’s requirements. In particular, in relation to all research services, firms should be able to “justify” to the FCA and to their clients “their decision to acquire a particular service with dealing commission and why it is a research service.”
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