Investment managers in the United Kingdom are still falling short when it comes to their use of soft dollars, and ensuring “best execution” for their clients, the Financial Conduct Authority (FCA) said Friday.
An FCA review of trading commission expenditures by a selection of asset management and wealth management firms found that most firms are still not meeting the regulator’s expectations, and that poor practices that the regulator has previously identified are still common in the industry.
Overall, investment firms have more work to do to “ensure they spend their customers’ money with as much care and attention as if it were their own,” the FCA says in a statement.
Among other things, the FCA review found that firms are still using commissions to pay for prohibited products and services, such as corporate access and market data; it also identified poor practices at the majority of the firms.
The review found some signs of improvement in how firms pay for research, including measures to mitigate conflicts of interest and improve transparency, and identified firms that have enhanced their oversight of the spending of commissions.
Moreover, firms that have been more diligent in this area have generally reduced their spending on research and boosted returns for investors. “If more firms implement either of these approaches, it should drive better quality research across the market,” the FCA says.
The FCA also says it has concerns about firms ensuring “best execution,” including firms that aren’t treating research and execution as distinctly separate services.
“A particularly concerning practice saw trading counterparties being selected on the basis that they should be rewarded for research, raising potential issues about the ability to demonstrate best execution,” the FCA says.
The U.K. regulator plans to revisit the question of best execution this year, “to see what steps investment management firms have taken to assess gaps in their approach to achieving best execution and how they can evidence that funds and client portfolios are not paying too much for execution.”