“The issue is that the Financial Conduct Authority has had a bee in its bonnet about the use of dealing commissions since at least 2001, when the Myners Report came out,” Andrew Upward, vice president in the market structure group at Rosenblatt Securities, told Markets Media. “As the biggest national regulator in Europe, the FCA has a great deal of influence on ESMA.” The Myners Report argued that standard market mechanisms presented a weak control on the total cost of bundled services, as the lack of transparency and accountability in relation to commission costs made it difficult or impossible for customers to establish whether the investment manager was controlling conflicts of interest effectively, and was therefore delivering value for money to its funds.
In its February statement, “the FCA asserted that CSAs would not qualify as a so-called research payment account, which is what ESMA had suggested as the mechanism by which payment for research could be made,” said Upward. “It was supposed to be a separate account that would be effectively pre-funded and distributions would be made out of that account to pay for research.”
Instinet Europe announced its application as a payment institution with the FCA, whereby it would offer a new segregated cash management and payment service to clients who choose to operate a hard dollar “research payment account.” Instinet views RPAs as complementary to its existing Commission Management business, having seen CSA balances double year on year, and reach a new record high in February 2015.
“Since it is not clear yet whether the final MiFID II rules will allow research payments through existing CSAs, Instinet’s action is a hedge for its own commission management business,” Integrity Research Associates said in a research note.
If CSAs are scaled back or prohibited in Europe, asset managers are likely to increase their CSA usage in other regions.
“Globally, the issues like what the Europeans are dealing with right now will serve to increase usage of CSAs,” said Upward. “The jury is still out on what it means in Europe, because if on the European level, it’s clear that CSAs, in their current form, are not going to be adequate, CSAs in Europe are either going to have to be enhanced to fit the parameters of ESMA’s technical advice, or they are not going to be used at all.”