The UK financial regulator chief has stressed the need for more clarity on how asset managers pay for research, a thorny topic highlighted by a recent study showing they face a $5 billion global hit over changes to payment on such services.

Martin Wheatley, chief executive of the Financial Conduct Authority, said asset managers must be clearer on their charges and fees and avoid conflicts of interest.

His speech flags up the issue of how fund managers pay for sell-side research; the FCA is looking at how to avoid any conflicts of interest that may arise when portfolio bosses pay certain firms for information. Most fund managers pass on the cost of equity research (about $5 billion a year) to their own clients, who pick up the bill as part of a brokers’ commission for buying and selling stocks on behalf of the fund. As regulators step up efforts to police potential conflicts of interests between asset managers and investment banks, firms could soon be forced to pay for any research they require out of their own pocket.

The FCA said it will consult asset managers to see what changes need to be made to the existing regulation, which has been in place since 2006. A specific concern is that some asset managers are pushing the definition of ‘research’ by using client commissions to cover non eligible costs and services, according to a statement from the FCA.

“This is a critical period for the industry; a crossroads. So today we ask some challenging questions.  Are we internationally competitive?  Are charges and fees transparent? Are there inherent conflicts within the system?  Today we start a debate,” Wheatley said.

The FCA’s work includes talking to asset managers in the UK and policy makers in Europe to find a balanced regulatory solution; launching a consultation paper in November to clarify rules on research, including guidance around corporate access; and a thematic review that follows up on the FCA’s earlier work looking at conflicts of interest within asset management.

Reaction

"Conflict of interest is going to be a key area of regulatory scrutiny in 2014 and regulated firms can expect intensive supervision of their governance arrangements in managing conflicts. The regulator will want some high profile fines in this area to drive the message home following on from its thematic review into the asset management sector, and the rest of the industry will need to sit up and take note. Key areas of focus will be commissions, gifts and entertainment and PA dealing," Nicola Higgs, a senior financial regulation lawyer at Ashurst, the law firm, said in a note.

"We are expecting new rules on the ability of asset managers to pay for corporate access in November. This will impact not just the managers themselves but the investment firms who facilitate access to their corporate clients. We are already seeing many firms implement new processes to address the FCA's concerns on the on the way corporate access is provided to managers," Higgs continued.

"Complex conflicts mapping exercises take time and firms must start work now to ensure they are prepared for the regulatory scrutiny ahead. Adequate conflicts arrangements are vital if a firm wants to be able to demonstrate that it takes conduct risk seriously," she added.