UK – The European Asset Management Association and the UK’s Investment Management Association have expressed concerns about regulations proposed by the UK Financial Services Authority on ‘bundling’ and ‘softing’.

This week the watchdog announced proposals aimed at making fund managers more accountable to investors. Under the proposed new policy, fund managers would no longer be able to incur costs for services additional to dealing without the customer’s agreement.

With regards to ‘bundling’, whereby the provision by broker of other in-house services such as research, is combined with dealing in securities in a single commission charge, the FSA is proposing greater transparency, and ‘unbundling’.

“Up to 40% of total commission paid by_investors is used to acquire services additional to dealing, so it is important that investors are clear how their money is spent,” says Gay Huey-Evans, director of the FSA’s markets and exchanges division.

The IMA disputes that regulation is needed. “The presumption should be that new regulation is introduced only when there is a clear need. This proposal reverses that presumption,” said IMA chief executive Richard Saunders.

The European Asset Management Association has also warned against over-regulation, although it supports greater transparency. Klaus Moesse, president of the association commented: “I believe …that as long as trade execution costs are made fully transparent, and clients are kept informed of how their asset manager achieves best execution, there appears to be little justification for regulatory intervention in this area.”

The FSA is also proposing that managers should no longer be able to use soft commissions to purchase services such as dealing screens. Soft commission is where fund managers send trades to a broker and receive, in addition to the trade execution, credits which can then be used to purchase services such as research and market information services usually from third party providers.

Consultancy firm Mercer Oliver Wyman believes that “while softing practices can reflect poor management of transaction costs, it is the overall management of sell-side value relative to costs that needs to be evaluated before taking action”.

Says John Romeo, director of capital markets practice at Mercer Oliver Wyman: “The real challenge is not how to eliminate softing, bit for the buy-side to tackle the larger problem of their cost structures and optimise use of external service providers.”

The FSA’s review of soft commission arrangements and bundled broker services follows Paul Myners’ review into fund management. The former Gartmore chief claimed that the system “creates an artificial bias for fund managers to have services provided by the sell-side, distorting competition, since the costs for these will not be scrutinised by the client and are not a direct charge to the fund manager’s profit.”

A cost-benefit analysis released by consultants Oxera this week reveals that of the 2.3 billion pounds paid as commission by UK institutional fund managers to UK brokers in 2000, between 660 million pounds and 800 million pounds was spent on services additional to dealing.

The FSA’s consultation will continue to August 29.


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