An independent body or "investor representative" has been proposed by the FSA to act on behalf of retail investors on the esoteric issue of soft commissions in the field of retail funds.
The proposal is included in consultation paper CP 05/13 Bundled Brokerage and Soft Commission Arrangements for Retail Investment Funds, which follows on from previous consultation on the issue of ‘softing’ affecting institutional clients.
Applying new rules in the retail fund market are necessary to ensure “fairness and accountability for investors”, the FSA states, while also ensuring any expenditure by investment managers charged to clients’ portfolios represents value for money.
”For this to happen, there must be competitive pressure on the manager, which will come through widespread transparency and accountability,” the FSA states in CP 05/13.
”If pooled investment vehicles are not subject to a reasonable degree of scrutiny in terms of commission costs, there is a risk that the disclosure-based approach as a whole will not succeed. It may even operate to the detriment of customers whose share of brokerage costs is not being actively monitored. We think some further regulatory intervention is needed to mitigate this risk, at least for vehicles in which retail investors participate.”
The investor representative would consider such expenditure, and if necessary interact with the manager concerned.
Most retail investors would find detailed information on soft commissions “largely meaningless”, the FSA says, which is why the representative would be required.
“The representative should not, however, be expected to act as an overseer or auditor of the investment manager. The role should not entail, for example, checking the accuracy of data disclosed, or reviewing the processes by which brokerage arrangements are established and operated. The representative will not be expected to carry out an exhaustive analysis of past dealing activity, nor to attempt to second-guess the manager’s judgement about a specific transaction.”
“Investment managers, in their turn, should expect to treat each investors’ representative with the same consideration they would show to any other customer with a portfolio of comparable size and complexity. They should respond to comments and enquiries in a timely and thorough fashion, and should give due weight to any concerns expressed or any recommendations for changes in practice.”
Types of representatives suitable for different types of funds include:
Information disclosed as a result of the new regime should also be available to other parties, the FSA proposes. This may include academics and journalists.
However, the regulator also poses the question for those responding to the consultation whether or not making such information more widely available would actually bring about any of the “competitive pressures” on managers it says the regime should have as its objective.
“We do not think that publishing bundled brokerage disclosures can alone be relied on to deliver transparency and accountability in retail investments.”
Responding already to the FSA's proposals is the Investment Management Association, which says it is "particularly concerned by the FSA’s suggestion that information on brokerage and commissions should not be made available to the retail investor."
"IMA believes that investors should have access to the same information as reported to the trustee in order to see where their money is being spent."
It also queries the apparently different approach to collective investment schemes (CIS), where trustees would have oversight, potentially not making the relevant information public. This does not tally with the FSA's goal of "fairness and accountability to investors," the IMA states.
The deadline for responding to CP 05/13 is 6 January next year. New softing rules for institutional investors and their fund mangers take effect in January, typically applicable to the cost of dealing commission.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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