Dealing commission

Speech by Martin Wheatley, Chief Executive of the FCA, at the FCA conference on dealing commission in London. This is the text of the speech as drafted, which may differ from the delivered version.

martin wheatley speech migration.jpg

Positive engagement

Good morning and welcome everyone. This is an important review, as we all know, so I’m delighted to see so many senior industry colleagues joining us today.

Before handing over to Clive, I wanted to offer some broad observations on asset management in the UK and the European context.

my thanks to the sector for its constructive engagement with the FCA over the last nine months on issues that are, frankly, very complex and have (at times) demanded difficult conversations.

But before I do that, a couple of quick points. First, I wanted to extend my thanks to the sector for its constructive engagement with the FCA over the last nine months on issues that are, frankly, very complex and have (at times) demanded difficult conversations. The positive nature of today’s publication – our thematic review on dealing commission – owes much to the willingness of firms themselves to move these debates forward.

Second, I wanted to make it clear this morning, from the outset, that the FCA is very aware of its own responsibility to the UK asset management industry. I’ve spent most of the last year arguing that effective financial regulation is not a zero-sum game, where for one side to win the other has to lose.

And it seems entirely sensible to me to see the regulation of asset management in that non-zero sum game context, with the FCA supporting this £5.2tn market to work well.

Ninety percent of the time of course, this is exactly what happens. The market does work very well. And it’s clearly difficult for any of us to overplay the importance of investment management to either the UK financial industry, or to everyday savers.

you want the UK asset management industry, alongside regulators, to be helping to shape the conversation, rather than being led by it.

The difficult debates

Nonetheless, no industry remains successful without a willingness to evolve with the times – or to deal with difficult debates. And dealing commission (now worth some £3.5bn a year) is clearly one of them – with many complex questions analysed in today’s report.

So, for example, do we have proper scrutiny of spending on external research by fund managers? Are we are achieving value for money (VfM)?

Does the bundling of services into execution arrangements mask underlying value too much? Does it allow fair competition for providers of independent research? And so on and so forth.

In an environment where quality of client services is now a significant factor in overall investor satisfaction – and where global markets are effectively competing harder on integrity and transparency – so, product disclosure requirements in Hong Kong; the banning of front-end fees in India; investor testing in Singapore; Dodd-Frank in the US and the like – it seems sensible to analyse these kind of questions and land on the right side of international reform.

In other words, you want the UK asset management industry, alongside regulators, to be helping to shape the conversation, rather than being led by it.

International agenda

There are two priority areas where this is happening that I wanted to reflect on this morning. First in the EU. Second of course, domestically.

On the former, as we all know, ESMA has now published its consultation on MiFID II, which follows the agreement on the Level 1 in January. This (in turn) indicated a significant restriction on the inducements a portfolio manager can receive when providing MiFID investment management services. 

ESMA’s consultation paper interprets this approach strictly, to prevent the receipt of most research in return for dealing commissions.

The key imperative here for me in all the above: the importance of the work being done to set a level playing field for firms across Europe.

As we’d hope and expect, there is broad support among EU regulators for the proposals ESMA has set out. And the FCA will continue to work closely with firms to make sure new European rules deliver the best outcome for investors.

We know there’s some concern over the wider international aspect.  We’re actively discussing these issues at IOSCO, and international regulators will be paying attention to developments in Europe and what the implications might be for other jurisdictions.

If MiFID II does bring significant reform across the EU, frankly, it would make sense – given the international focus on quality of client services I’ve talked about – for globally active asset managers to see this as an opportunity to deliver better transparency, and value for money for customers within the EU, and not look to avoid new rules by preferring other jurisdictions.

ESMA’s consultation closes on 1 August and I encourage you to provide detailed and considered feedback on its proposals. During the discussion period of our document, which closes later on 10 October, our doors will still be open – if you want to contact the FCA and talk about this, please do.

We will not be publishing new rules on the back of this paper, but will work with what is proposed as part of MiFID II.  Any further discussion or consultation on changes on dealing commission is likely to link to our wider work to implement MiFID II by January 2017.

Domestic agenda

Finally, before I hand over to Clive, a quick word on the domestic focus of today’s publication.

One of the key objectives, as everyone here knows, of the dealing commission regime is that investment managers should be operating in the best interests of investors.

Clearly, there are significant question marks today over whether this is happening as uniformly as it should. And there is a strong sense now I think – not just within regulation by the way, but in industry too – that the dealing commission payment mechanism is a problem in search of a solution.

At the FCA asset management conference last year, it was voted the number one priority for regulators by delegates, with more than 70% saying the current funding model for research does not work in the best interest of investors. 

It was also interesting, I think, to see recent Thomson-Reuters and CFA surveys highlight the challenges here. On the former, asset management CEOs listing dealing commission as one of the top issues to resolve. On the latter, only 16% of CFA members agreeing that the market for research in the UK is transparent in terms of value and cost.

It is entirely right I think that these issues are being raised by all players, with the FCA and firms – both buy and sell-side, as well as research companies, trade associations and the like – all looking at the challenges here and possible solutions to the current model.

So to end, I want to reiterate my statement of last year – that we are not going to unilaterally make a decision; we wanted to be – and have been – open and transparent with you on dealing commission.

We saw 139 firms at our roundtables, attended a number of events hosted by trade associations and the feedback is all built into our publication today – and I want to thank you for your continued engagement.


As we look further forward, I’d also encourage firms to comment on the broader FCA call for input on our planned wholesale sector competition review, which was published yesterday.

We’re interested here in whether there are features of specific markets that might inhibit or distort competition. Are there barriers to entry or expansion? Information symmetries? Conflicts of interest? Cross-selling? And so on and so forth.

As some here we’ll have seen, we’ve put forward suggestions on a number of potential future market studies, which includes dealing commission – as well as broader or related areas like market infrastructure, investment banking, corporate banking and asset management.

Alongside this work of course, we have the fair and effective markets review now running, with its focus on key wholesale market areas including: fixed income, currency and commodity markets.

The intention here is to reinforce confidence in the fairness and effectiveness of UK wholesale financial market and (crucially) to influence the international debate. As the Chancellor said on its launch: ‘the integrity of the City matters to the economy of Britain’.

And this reflects the fact, I think, that it’s in all our interests to find effective solutions to potential competition or conduct issues before they consume individual firms or markets. The non-zero sum game argument, if you like.

And, talking about dealing commission here specifically, I think it is an enormous credit to the UK’s asset management sector that it has been amongst the most determined to find those solutions.

So, let me end with a thank you, once again, to firms for their positive engagement and an appeal to maintain momentum.