The IMA is urging its members to adopt ‘specific and understandable disclosure’ of research paid for through bundled commissions and is examining how an outright ban would impact the market.
It has published a set of eight criteria against which any new system, including one that includes an outright ban on bundled commissions, described as a ‘cash model’ should be considered.
The IMA says a move to a cash model would need careful consideration as it might potentially ultimately lead to consumer detriment.
Fund managers should set budgets for the amount of research they use paid for through bundled commissions and should have clear conflict of interest management strategies in place says the IMA.
The body has published a series of proposals for tackling concerns over conflicts of interest in the use of bundled commissions to pay for research in a paper published this week.
The paper, The Use of Dealing Commission for the Purchase of Investment Research, highlights a lack of data from fund managers on how much they spend through bundled commissions. The paper says “in comparison with the vast amount of data available to allow investment managers to analyse and compare the cost of execution services across a variety of providers and execution venues, the absence of data about research costs is particularly stark”.
The IMA estimates that globally over half of the total global investment-manager-directed expenditure on externally sourced research is paid for through bundled commissions. The paper says ‘the cost of research is typically passed back to the client, alongside the execution cost of buying or selling equities’.
The IMA says its members should set up research oversight committees to ensure research is obtained and paid for in a fair way. It says managers should ensure conflicts do not arise between clients of different size, or between different asset classes. The paper highlights the complexity of untangling bundled commissions paying for research that are allowed overseas but not in the UK.
But the IMA adds that any reforms must not impede the UK’s position as a financial services centre of expertise.
But the report identifies a number of potential impediments to the creation of a pure cash market for research including unintended negative impacts on SME research and a raising of barriers to entry for start-up investment managers, which it says could damage innovation and competition that benefits clients.
The IMA says it is willing to work with the FCA to assess alternative business models, including a pure cash model, with an open mind.
Investment Management Association chief executive Daniel Godfrey says: “For many investment managers research is an integral part of the investment process. It informs their decision making process and helps them deliver returns for the benefit of clients. This report aims to inform the discussion on the future business model for research to ensure value for money, transparency and accountability.
“There are clearly challenges and conflicts inherent in the current business model and the IMA is open to radical change. But there are also advantages and we should make sure that we are not inadvertently losing something valuable by changing the model without a thorough assessment of all the factors. In particular, we believe that radical change would need to be introduced on an international basis to avoid both arbitrage and damage to the UK’s competitive position.
“This report does not pretend to provide a conclusive answer, but does provide a strong basis on which all stakeholders, including consumers and providers of research, as well as regulators, can work together to determine what changes would deliver the best outcomes for clients.”