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FCA unbundling proposal: an alternative to the ban

The FCA found that two of the 17 investment managers surveyed in its recent review of research payments had sufficient processes to meet their guidelines.

Although the financial regulator was disappointed by this low figure, the findings highlight the fact that it is possible to meet the necessary standards without resorting to an outright ban on funding research from commission payments.

Greater transparency around payments for research should alleviate the FCA’s concerns while avoiding the potentially harmful unintended consequences of a ban (read my previous blog on this issue here).

But to achieve greater transparency, the FCA may have to move away from a principle-based approach to a prescriptive regime. This could involve mandating that firms track their commission payment procedures, including introducing fixed research budgets and comprehensive processes to determine the price they pay for research.

As demonstrated by the firms that are already meeting the FCA’s guidelines, there are already processes available which allow users to meet the regulator’s standards without the need for a ban. Tools exist today to enable the buyside to manage commission payments and provide an audit trail to demonstrate exactly how they have valued research.

At a recent conference discussion on the issue, there was a strong consensus that the renewed focus on the unbundling issue has forced the industry to address these issues internally; an “evolution” rather than the imposed “revolution” that the FCA’s prospective ban would entail.

Industry participants are in general agreement that research providers do know the price of their services and, in cases where the buyside did not agree with the proposed costs, such disagreement can and is resolved through customer management.

These developments suggest that the buyside is already actively engaged with putting a value on the research it receives, and is accustomed to challenging the brokers to get value for money.

However, the question remains whether the FCA has now lost faith in the ability of the buyside to police itself. 



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