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Markets Regulation
Europe pulls back on research cost revamp
From the Financial Times of Tue, 11 Nov 2014 21:08:33 GMT
A logo sits on a window in the reception area of the headquarters of the Financial Conduct Authority (FCA) in the Canary Wharf business district in London, U.K., on Thursday, Nov. 21, 2013. The FCA is working with regulators including the U.S. Department of Justice and the Commodity Futures Trading Commission to investigate the potential manipulation of the foreign-exchange market. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

The UK markets regulator is set to fail in its attempt to introduce a Europe-wide ban on brokers bundling the cost of research with trading, according to a senior European politician.

The Financial Conduct Authority is seeking to put an end to banks charging investors for research out of share-dealing commissions, and hoped to have a tougher regulatory approach included in Europe’s review of its securities markets legislation, known as Mifid II.

The regulator wants to separate these payments to reduce conflicts of interest, clarify the costs being incurred and ensure investors get a better deal.

Its move has been opposed by many banks and some large institutional investors. The proposed reforms have triggered warnings that London’s competitiveness as a financial centre could be put at risk by the changes, squeezing the profits of smaller asset managers and putting some small brokers out of business.

The European Securities and Markets Authority (Esma), the pan-European regulator, has been assessing the proposals. However, it has rejected the FCA proposals in favour of more transparency from brokers, according to Kay Swinburne MEP, Conservative co-ordinator for Economic and Monetary Affairs.

“The banning of dealing commissions was discussed in meetings and there was a clear decision taken to not ban the use of commissions,” she told the audience at a Financial Times event in London. “MEPs have subsequently made it very clear to Esma that disclosure of the use of commissions is sufficient and banning of commissions should be off the table,” she added.

Ms Swinburne added that some national regulators were able to be stricter than Esma. “The FCA, however, has the flexibility to go further under investor protection if they choose to do so, and we need to make sure they do not deviate too far away from the Esma rules,” she said. Separating costs could hurt the research market and efforts to bring companies to the market, she warned.

Separating costs would encourage greater competition and more transparency over the price of research, the FCA said in May. The regulator has estimated commission payments to be worth around £3bn per year.

The FCA also said earlier this year that institutions should only be paying for services directly related to executing a trade or substantive research out of dealing commission.

“EU reform under Mifid II represents a unique opportunity to deliver significant structural change on a pan-European basis,” it said as part of its market consultation in July.

In a response two weeks ago, BlackRock, the asset manager, called for change to be co-ordinated globally by the International Organization of Securities Commissions (Iosco), an umbrella organisation of the world’s securities regulators.

“Reform in the UK or the EU alone will not of itself drive change in other major markets unless there is strong global consensus and commitment to change,” it said.

It added that widescale adoption of commission-sharing arrangements would also benefit end investors. CSAs are regarded as a middle ground as they make it easier for institutional investors as they are able to route payments to alternative research providers.

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