Britain’s Financial Services Authority is proposing a new policy to make fund managers more accountable to investors.

Under the policy fund managers would no longer be able to incur costs for services additional to dealing without the customer’s express agreement. This means that managers would have to negotiate with their customers on how much to pay for such services.

The FSA is also proposing that managers would no longer be able to use soft commissions to purchase services such as dealings screens.

Gay Huey-Evans, director of the FSA’s markets and exchanges division said as much as 40% of total commission spending is used to acquire services additional to dealing “so it is important that investors are clear on how their money is spent.”

“These proposals are designed to do away with distortions in the market and make fund managers more answerable to their clients,” Huey-Evans said. “Our analysis suggests changes to the regulatory approach should foster competition and ensure a better overall outcome for investors.”

A review of institutional investment published in March 2001 suggested that commission costs incurred by fund managers on their clients’ behalf should be reflected in the fund manager’s fee to investors. The government subsequently agreed with the FSA that it would examine these issues in the context of its review of best execution. The FSA’s proposals deal with the fund managers’ conflicts of interest by requiring them to be directly accountable to their clients for the costs of additional services.

In 2000 British institutional fund managers paid more than £2.3 billion as commission to British brokers. It is estimated that fund managers spent between £660 and £880 million of the commission on services additional to dealing. Of this between £500 million and £720 million was spent on investment research. In 2001 at least £90 million was spent on market pricing and information services.