Commission Issues In The UK Market
By: Todd Burns
The IMA (Investment Management Association, UK) Disclosure Code is now widely accepted as the industry standard for the reporting of brokerage commissions and how they are split between research and execution. The disclosure code is in response to the FSAʼs (Financial Services Authority, UK) objectives in directing managers to increase transparency and lower trading costs. Lynch Jones & Ryan (LJR) has supported and continues to support in full the efforts of the regulators, legislators, trade associations, and market participants in the progress that has been made to date in providing greater transparency of brokerage costs.
However, the way in which the Disclosure Code has been translated and implemented throughout the investment management industry leads us to believe that there is still considerable opacity surrounding the generation and use of commissions and confusion interpreting the new disclosure requirements.
Thus far, there is a clearer understanding of the cost of execution; we still know very little about the cost of research or reason for choice of research provider. We have certainly seen commissions level out within the UK market and believe there is a consensus that a full service commission will cost between 15 bps and 20 bps – with five to eight bps for execution and the remainder for research. It is this larger portion of the commission that still lacks clarity in its reporting. There remains much room for improvement on the reporting of how and where this component of the commission is spent and, most importantly, why it is spent.
Although there is a requirement for information on participation in commission recapture programs in the Level 1 disclosure, this has not been fully followed through into the Level 2 disclosure where there is no specific reference to such programs. While disclosure of the details of such programs is arguably covered by the general heading of commission payable “at other rates,” there is no direct requirement or pressure on managers to disclose accurately, or on a comparative basis, the precise benefit to underlying clients resulting from participation in commission recapture programs.
It was originally expected that the enhanced disclosure under the new rules would ultimately lower the cost of trading. So far, we have seen little evidence of this. The investment managers and brokers seem to have negotiated lower blended rates (11 bps in some cases), but this is commonly among the larger managers. In the majority of cases, the funds were paying between 15 and 20 basis points before the new rules were implemented and are paying exactly the same now. The only difference is that it is now clear what the cost of execution is. Unfortunately, this remains a small proportion of the fundsʼ overall commission bill.
Further, in reporting the purchase of research, the Disclosure Code could never attribute the cost of individual pieces of research or pieces of ʻoriginal thoughtʼ to the equivalent value in performance of a fund. There is still no delineation or description of services or proprietary research purchased. Let us be clear about the FSAʼs defi nition of research:
- It needs to be original thought.
- Research should be a critical and careful consideration of new and existing facts.
- It should have intellectual rigor; not merely stating what is self-evident.
- It needs some form of proprietary analysis or manipulation of data to reach meaningful conclusions.
We believe that if a clear description of the value and services rendered from these commissions is not articulated, the pension fund client is not getting the true benefit.
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