On 3 March 2017, the FCA published its findings from a review analysing dealing commission expenditure across 31 investments managers between 2012 and 2015. The investment managers covered asset managers, wealth managers and host-authorised corporate director providers.
The FCA visited 17 of the 31 firms to assess their arrangements, including how they had responded to its July 2014 discussion paper on the use of dealing commission regime. Whilst acknowledging that some practices had improved, the FCA found that the majority of firms were falling short of its expectations.
Areas of concern included how:
- firms assess whether a research good or service is substantive;
- firms attribute a cost to research if they receive it in return for dealing commission; and
- firms record their assessments to demonstrate they are meeting COBS 11.6.3R.
At the "extreme end" of the poor conduct, the FCA found that some firms were using dealing commission to purchase non-permissible items such as corporate access and market data services.
Other criticisms included:
- limited thought into how research budgets were set, or failure to set research budgets at all;
- where budgets were set, failure to monitor them or to investigate where they were exceeded;
- failures of systems, controls and record keeping;
- failure by firms with overseas operations and those who delegated investment management services to implement adequate controls and oversight structures;
- best execution concerns where firms appeared to be selecting trading counterparties as a reward for research (see elsewhere in this issue "FCA to target investment managers that fail to meet best execution obligations").
The FCA felt that much of the poor practice it had previously highlighted was still commonplace. It said that it would continue to focus on the use of dealing commission and would commence investigations into firms and individuals as necessary. In keeping with its focus on senior management, it said that it would seek confirmation that boards had demanded satisfactory management information on the topic.
Firms and individuals would do well to review these findings. Given the amount of work that the FCA has done in recent years to promote good practice and to provide guidance in this area, and the apparent failure of firms and individuals to take note, there is a very real prospect that we will see enforcement cases coming through in due course.