FCA is concerned that firms are failing to meet expectations on use of dealing commission. It carried out a review of 31 investment managers, to see how they had responded to its 2014 discussion paper on the use of dealing commission. Following the review, FCA is particularly concerned about poor practices for paying for research, research budgets, research polls, systems and controls and conflicts of interest. It found many firms could not assess whether a research good or service is substantive, could not attribute a cost to research received in return for dealing commission and did not record assessments that would prove compliance with COBS 11.6.3R. Some firms even continue to use dealing commission to pay for non-permissible items.
FCA found a number of firms are using their own resources to cover the cost of externally produced research and that others have clear processes in place to show how carefully they decide how to spend dealing commission. FCA is pleased with this, but less pleased that many firms showed practices that evidenced little thought or consideration behind setting and managing research budgets. Other findings of concern were that FCA found little evidence of arrangements to show that only substantive research is paid for using dealing commission, and that firms did not properly consider the potential conflicts of interest associated with having free corporate access from brokers.
FCA says firms need to do significant work to ensure they spend customers’ money with as much care as their own. It wants firms to scrutinise their practices, and hopes to see a reduction in the dealing commission they spend on research. FCA warns that where it identifies breaches of its rules or principles, it will consider appropriate action, including more detailed investigations into specific firms, individuals or practices.