Corporate access has become a fairly widespread practice whereby brokers arrange meetings between their buyside clients and executives at companies in which they may want to invest.
In 2014, UK regulators banned brokers from providing this service for free, believing it served to induce an buyside firm to trade with that broker. Instead, the FCA insisted UK asset managers must pay for access to companies themselves via a separate and independent process.
In an interim report on the UK’s money management industry on November 18, the FCA said it remains “concerned that a minority of firms are continuing to use client dealing commissions for services which we have explicitly deemed ineligible for payment from commissions, such as corporate access and market data services”.
It added: “Where this has been found we are addressing this on a firm specific basis and where deemed appropriate, a referral for investigation will be considered.”
The FCA will be obliged to adopt EU-wide rules governing trading inducements being ushered in under the EU’s revised markets in financial instruments directive, coming into effect in 2018.
Mifid II takes a strict approach towards trading inducements: any service provided by brokers that might be seen as an attempt to lure a firm to trade with them will have to be unbundled and paid for separately, rather than using client dealing commissions. That includes items such as investment research and corporate access.
On investment research, Mifid II states investors must either make the payments out of their own resources, or set up special “research payment accounts” funded by explicit research charges to the client.
In the report on November 18, the FCA said its 2016 supervisory work had found the majority of firms sampled were already setting budgets for research spending. However, it added that “most firms are still not applying the same rigour and oversight to the way in which they spend clients’ research budgets as when they spend their own money”.
The FCA also expressed concern over practices around “best execution”. This is an investor protection measure designed to ensure asset managers are getting the best trades possible for their investors, based on factors such as price and likelihood of trading.
The FCA said it visited eight firms in 2016 to review their best execution practices, finding they had “effective governance process in place that challenged the overall costs of execution” and had data that allowed them to “accurately view equity execution costs”.
However, it said “the way these data were used was mixed and not all firms could demonstrate the improvements they had made to their execution process based on these data”.
It said that firms that managed fixed income products found it more difficult to show they were minimising trading costs, partly because of the limited liquidity of these instruments.