(Refiles with no changes to text)
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Dominic Elliott
LONDON, Nov 23 (Reuters Breakingviews) - Here comes another
headache for the equities business. The UK Financial Services
Authority is to stop fund managers using equity trading
commissions to pay brokers for arranging face time with company
management. The regulator’s thinking is that "corporate access"
doesn't constitute equity research. It’s a sensible move that
removes a bad incentive for fund managers to shunt trading
business to certain brokers.
Corporate access has become big business. The proportion of
dealing commissions allocated to the activity has almost doubled
in three years to 27 percent, according to the latest Thomson
Reuters Extel survey of fund managers, published in June. That
seems excessive, putting corporate access on a par with the
amount spent on trading and execution.
True, there may be value in meeting lesser known companies
that analysts tout as the next investment gem. Fund managers
rated corporate access as the third most important out of seven
categories of research, Extel says. But the biggest fund
managers rarely need an investment bank to provide this service.
Most boards would find it hard to turn down a direct request for
access from the likes of BGI, Fidelity or State Street -
particularly where they already underpin the company's share
The FSA is expected to review the way in which dealing
commissions are divvied up next year, but in the meantime has
effectively banned the industry from using client money for
corporate access, market data services and preferential
treatment for IPOs, a recent report by the Centre for the Study
of Financial Innovation points out.
The move hurts big brokers, who will lose a source of
advantage over smaller independent boutiques. It also kicks
asset managers, which may have to use their own management fees
to pay for these services at a time when returns are feeble.
Right now, the equities business needs this like a hole in
the head. Global revenue in cash equities at 10 of the largest
investment banks was down 25 percent to $7.8 billion in the
first nine months of the year, according to analytics provider
Coalition. The FSA's corporate access crackdown rubs more salt
in the wound for the creaking business model.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- The UK's Financial Services Authority said in its November
letter to chief executives of asset management firms that the
industry had failed to prove that access to company management –
known as "corporate access" – constituted research. The FSA said
that was a service typically provided to the asset management
industry by investment banks.
- According to a report by the Centre for the Study of
Financial Innovation, written by Vince Heaney and published on
Nov. 16, the FSA's view on corporate access may force the asset
management industry to pay for corporate access out of its own
pocket rather than through dealing commissions paid by their
- A person familiar with the FSA's stance confirmed the
regulator is keen to crack down on the use of dealing
commissions to pay for corporate access. The regulator's letter
to asset manager CEOs also said there was no evidence that
preferential access to IPOs and market data services constituted
- For previous columns by the author, Reuters customers can
click on [ELLIOTT/]
(Editing by Chris Hughes and David Evans)
Keywords: BREAKINGVIEWS EQUITIES/
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