The UK's Financial Services Authority is proposing to redraft its rules on soft commission payments between brokers and fund managers to expressly prohibit the bundling of electronic information and automated execution services in return for research and other services.
The watchdog is informally consulting market participants on a proposed tightening up of the guidelines, which were first issued at the beginning of the year. At the time, the FSA allowed fund managers to make their own interpretations of the precise nature of goods and services covered by the code.
The proposed changes follow queries from brokers concerning connectivity services and associated electronic systems and whether these services could be paid for out of client commission. In particular brokers had enquired whether client commissions could be used to pay for direct fund manager/broker telephone lines, electronic communication and associated technical systems supplied to and used by fund managers.
The FSA says there was particular concern that inconsistencies in interpretation of requirements would lead to competitive distortions, with firms taking a strict approach losing business to those who took a more liberal interpretation.
The proposed amendments to the guidance would specifically prohibit the inclusion of "connnectivity services such as electronic networks...and computer software including order and execution management systems".
Says the FSA: "This does not mean that firms cannot purchase the goods and services that they value. Rather our position is that the commission charge is not the appropriate charging or payment mechanism for funding the purchase of these goods or services. Firms of course, recoup the costs of these services from clients under specific agreements or indirectly through their management charge."