Thanks to Financial Adviser for this and thanks to the Office of Gregg McClymont for sending me the link
According to the Financial Times, the FSA has found that asset managers are spending “tens of millions of pounds” to get access to company chief executives, often paying brokers to set up meetings.
Ed Harley, head of asset management supervision at the FSA, told the paper that the regulator’s analysis of the use of client money by 15 asset managers had found large payments that were “hard to justify”.The payments break the rules set up by the FSA that clients’ money should only be used for trade execution and research.
Mr Harley told the Financial Times: “When we challenged firms as to how they can justify [payments for corporate access] they couldn’t give us a coherent answer that met those criteria.”
The FSA’s findings come after the annual Thomson Reuters Extel Survey found that 29 per cent of the dealing commissions received by European asset managers was being used for access to companies, a rise from 21 per cent in 2010So is a proportion of your savings being used to grease the palms of these brokers?
We will have to wait and see who is to be named and shamed before you can know the answer to the question in the title.
T we he second question that we need to ask is whether these costs are being taken out of the fund manager’s margin- eg the annual management charge or, as I suspect, being taken directly from the fund (in which case it will simply reduce fund performance – not the fund manager’s profits).
Of course what goes around , comes around. Paying a broker to get access to the senior management of companies you are looking to investigate invalidates the research. How can an independent view be formed when money is changing hand in this way and exactly what are the in-house analysts who fund managers rely om, really getting paid for.
Those investing in funds have every right to be outraged if the FSA have found this practice widespread.
We have another Twickenham home international coming up, look out for your favourite analyst , he’ll be in one of the glass-fronted boxes .
Related articles
- FSA to fine fund managers for violating rules (newstatesman.com)
- FSA to crack down on use of investor cash for CEO access -FT (uk.reuters.com)
- FSA to crack down on cash for CEO access (telegraph.co.uk)
- Fund managers under FSA spotlight over corporate access fees (guardian.co.uk)
- Who’s been sleeping in my bed? Shocking stuff on stock lending. (henrytapper.com)
- The dam is full – manage the sluices (henrytapper.com)
This is almost a twin of your earlier post on stock-lending. Underlying both is the entirely reasonable view of the scheme (or investor): it’s my money and should be spent for my benefit and not for the benefit of my agents.
It wouldn’t be unreasonable for an asset manager to book a Twickenham box and invite a corporate CEO (or three) along if they believed it would be of value (although I would be sceptical on the value). If, on the other hand, they are achieving this via soft commissions (which is indicated by the articles), then this is not in line with FSA regulations. Soft commissions relate to a broker providing services to a fund manager in return for business being routed through them and the regulations are pretty clear that they can only be used to buy services directly for the benefit of the client who own the account – so you could buy value-add research or transaction execution analytics.
I can’t find anything on the FSA website to clarify their view on the story so we’ll have to watch this space – perhaps also something interesting to talk to individual fund managers about at the next review meeting.
Worth noting that not every regulatory jurisdiction has the same standards of forbidding the use of softing, nor every type of pooled vehicle.
Martin
Veasey Associates Ltd
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