Final cordium dealing commission
31
4/26/22 1 CORDIUM POWERPOINT MASTER
description
In July 2014 the FCA published its discussion paper on the use of dealing commission regime which included the findings of its thematic review. This paper and the accompanying speech by Martin Wheatley publicly backed ESMA’s proposals for the full unbundling of research from execution as part of MiFID II. Should the MiFID II text be implemented as currently proposed, it would result in a major change of the way execution and research services are paid for in Europe. Irrespective of where MiFID II comes out, the FCA’s recent banning of payments out of dealing commission for corporate access and the findings of the thematic review, will no doubt mean that some firms are unsure of what they should be doing to meet the FCA’s expectations. In response to this uncertainty, Cordium are hosting a webinar with Will Morrell who has recently joined Cordium from the FCA where he led the use of dealing commission thematic review and Michael Hufton, a former fund manager and CEO of a new type of investor relations company. During this webinar we will help firms understand what the FCA expects and share some of our experiences of what firms are doing to meet these expectations. Topics for discussion include: - What is the FCA concerned about? - What does the FCA expect? - How do you evidence to the FCA that you are meeting their expectations? - The challenges and potential solutions of meeting these expectations Presented by: Will Morrell, Consultant, Cordium Michael Hufton, Director, ingage Date: Wednesday, 15th October 2014 Time: 2:00 - 3.00pm BST Duration: 1 hour
Transcript of Final cordium dealing commission
April 13, 2023 1CORDIUM POWERPOINT MASTER
2
The webinar will begin shortly…
You can join either by VoIP or dial in by telephone
Follow call in details if you select to use Telephone audio
Dealing commission – What should you be doing to meet the FCA’s expectations?
Will Morrell – Consultant, CordiumMichael Hufton - Managing Director, ingage
April 13, 2023 3
Why are the FCA looking at this issue?
April 13, 2023 4
How firms should demonstrate that they are acting in the best interests of their clients
o Manage conflicts of interest effectively, o Spend their clients’ money as if it was their own, and;o Ensure that investment decisions comply with the
investor’s stated aims and objectives.
April 13, 2023 5
The problems…
o Link between trading volume and research payment
o Firms directing CSA payments to ineligible services
o The opaque nature of the payment mechanism
o Frustrations of a fund manager…
April 13, 2023 6
Real world experiences of Bundling
• 18 years as a stock-picker in Europe, 10 as a fund manager & analyst, 8 in equity sales – seen it in action from both sides.• Inability to unpick the bundle. What do you really
pay for?• Inherent conflict: roadshow schedules routinely
circulated among sales and sales/trading desks. • Keeping abreast of meeting flow in an entirely
manual system all but impossible. Difficulties getting the meetings which matter.• Almost no innovation in corporate access for the
best part of half a century. It could all be done so much better.
What can we take from the DP? Is it possible to meet the FCA’s expectations?
April 13, 2023 8
Only 12% of asset management firms sampled met the regulators expectations but that does mean it’s possible.
Examples from the Discussion Paper (‘DP’)
“there are still too few firms applying sufficient rigour in assessing the value of the research services they use”
April 13, 2023 9
Examples from the DP
“Some of the better examples of investment managers seeking to assess the value of research involved an independent assessment by people not involved in the investment process, or the use of proxies such as other priced services in the market.”
April 13, 2023 10
Examples from the DP
“We would like to see investment managers and brokers discuss more about the price of research services to allow investment managers to meet their obligations to their customers.”
April 13, 2023 11
Examples from the DP
“the amount paid for research with dealing commission remained linked to the volume of trades carried out as they did not have research budgets or caps on research spend.”
April 13, 2023 12
Examples from the DP
“One firm was using dealing commission to pay for market data services in full with no apparent mixed-use assessment to determine which parts of the services were eligible to be paid for out of dealing commission and which were not.”
April 13, 2023 13
Examples from the DP
“firms should be able to pay for research without trading with that broker and pay for execution without paying for research.”
April 13, 2023 14
Support for Commission Sharing Arrangement (‘CSA’) from the DP
“Our work found that better practices generally involved CSAs.”
April 13, 2023 15
Support for CSAs from the DP
“A ‘vote’ did not typically represent a specific monetary amount; instead it represented a percentage of the CSA balance”
April 13, 2023 16
Support for CSAs from the DP
“Brokers stated that when they were paid bundled commission rates they often did not know what element of the commission payment was for research, rather than execution”
April 13, 2023 17
Corporate Access
“We found that brokers experienced difficulties in identifying who they were acting for – investment manager or corporate issuer client – when arranging corporate access services. If they are acting for the corporate issuer they should ensure only those investors it is in the corporate’s interest to see are given access”
April 13, 2023 18
Corporate Access
Martin Wheatley said in Oct 2013…
“We have no particular concerns with the purchase of corporate access…. But asset managers should be using their own funds if they wish to purchase access.”
April 13, 2023 19
Access linked to commission leads to an inherent short term focus
• In the old world institutions didn’t knowingly “pay” for access – but they were charged for it.• Corporate Broking is a free service in the UK
market - but it’s being funded from somewhere. • Dealing commission incentivises firms to
reward the highest payers to the detriment of corporates and investors. • Removing commission linkage benefits long
term investors, removes conflict and enables innovation, efficiency, cost reduction.
The Commercial opportunity for asset managers
• Work by the FCA and by Towers Watson highlights the increasing importance of transaction costs.
• Transaction costs now larger than all other costs combined for the average UK pension fund.
• This provides a unique opportunity to asset managers to reduce cost to the fund and increase performance.
Towers Watson: total costs have fallen but within this transaction costs have grown – and hence are an increasing problem
The impact of compounding: tiny improvements in cost ratios have a massive impact on returns to the end investor
“…every basis point of cost saving could translate into £264m in additional client returns each year. Over a thirty year period, a 1 basis point improvement in trading costs could represent an additional £37.5bn in client returns.”
Financial Conduct Authority (FCA) Thematic Review TR 14/13Best execution and payment for order flow, July 2014, (p8)
This all stems from The Kay Review: it’s about Stewardship & Engagement, not Access• “Asset managers can contribute more to the
performance of British business (and in consequence to overall returns to their savers) through greater involvement with the companies in which they invest.”• “The asset management industry can benefit
its customers – savers – taken as a whole, only to the extent that its activities improve the performance of investee companies.” • The role of equity markets is to oversee capital allocation within companies, promoting good governance and stewardship is a central function.
What is the solution to this conundrum ?• Our concept in designing ingage was to create
an electronic marketplace enabling corporates and investors to arrange access directly in an easy, efficient, low-cost and confidential way. • We are not selling access, we are selling a
software platform and a service. Meeting allocation by the corporate not by us. You arrange as much access as you want to have. • Completely de-conflicted model. Removes the
admin to keep costs low. Charges corporates and investors, levelling the playing field. Fixed fee subscription, zero cost per meeting.
What ingage offers:
• State-of-the-art IT platform based on Microsoft’s global cloud. Secure, encrypted, fast, available.
• Designed for mobility. Any web enabled device & dedicated apps.
• Meeting marketplace, reverse roadshows, conference calls, meeting notes, direct feedback, media content, user-maintained profiles.
• Full record keeping, reporting & analytics from the platform.
• Not just software, we’re a full service, professional team of 12 from across the industry vertical.
We act for some of the world’s most influential corporates and institutional investors
- 6th October 2014
Conclusion:
• Regulatory intervention is not the only rationale – it’s a catalyst for a better way.• Through a new model and automation we can
eliminate the conflict, increase efficiency and level the playing field – in the process substantially reducing cost to the investor.• Innovation brings new tools, comprehensive
record keeping and reporting and powerful analytics. • The old days of toll collectors between
corporates and investors are gone. Get ingaged !
In summary
o Assess the value of the services you use
o Ensure the services you are paying for are eligible
o Pay an appropriate amount
April 13, 2023 30
Questions
04/13/2023 31CORDIUM POWERPOINT MASTER
