Policy Statement PS/14/7
The FCA published its follow up to CP 13/17 on 8 May, confirming the changes being made to the use of dealing commission rules. These changes come into force on 2 June, giving firms only a small window to assess the impact and make the changes required.
The FCA has made it clear that, in its view, firms already compliant with existing rules that have sufficient systems and controls in place to demonstrate compliance should not need to make any material changes.
The FCA’s aim is to ensure investment managers seek to control the costs passed on to their customers with as much rigor as they pursue investment returns.
Concerns were first highlighted by the regulator in their ‘Dear CEO’ letter on conflicts of interest in asset managers published in November 2012. It found the majority of investment managers had inadequate controls and oversight in this area and were unable to demonstrate how research met the exemptions under the rules. The FCA published its proposals on changes to the rules in CP 13/17 in November 2013.
The changes are intended to clarify the existing COBS 11.6 rules and the FCA does not see its changes as being significant. The finalized rules should support the FCA’s operational objectives of enhancing consumer protection and market integrity. Whilst consulting on these rule changes the FCA have been conducting further thematic supervisory work at asset managers and brokers.
The exemption available for the provision of research has been amended and this now applies to “substantive research”.
Information on what is substantive research is provided in an evidential provision, although this has not in fact changed materially from the previous guidance on research. In particular the FCA has noted that the requirement for the research to provide meaningful conclusions is not new and has been part of the rules since they were introduced in 2006. The policy statement gives some further guidance on what meaningful conclusions are, with the FCA noting that the investment manager does not have to agree with them. In addition, non-written communications are capable of being substantive research.
Corporate access service has now been defined (a service of arranging or bringing about contact between an investment manager and an issuer or potential issuer) and is specifically included in the examples of goods or services that the FCA does not believe meets the evidential provisions and therefore should not be paid for with dealing commissions. In addition, if corporate access is received as a non-monetary benefit, firms should consider the FCA rules on inducements and conflicts of interest.
Bundled services and mixed-use assessments are subject to guidance. The FCA has confirmed that mixed use assessments apply equally to non-priced bundled goods and services, as they do to priced goods and services. The FCA has acknowledged that firms are likely to take different approaches to these assessments but firms need to show evidence of their processes and that judgements have been made with the best interest of customers in mind. The FCA also confirms that any items that are deemed ineligible can be paid for by means other than with dealing commission, for instance from the firm’s own resources.
Next steps for firms
Firm’s should consider their current arrangement and assess what changes, if any, are needed. Consideration should be given to the assessment of existing goods or services paid for with dealing commission and whether they meet the rule. If not already performed, this assessment should be documented and approved by someone appropriately senior within the firm.