Here comes another headache for the equities business. The U.K. Financial Services Authority is to stop fund managers using equity trading commissions to pay brokers for arranging face time with company management. The regulator's thinking is that "corporate access" doesn't constitute equity research. It's a sensible move that removes a bad incentive for fund managers to shunt trading business to certain brokers.
Corporate access has become big business. The proportion of dealing commissions allocated to the activity has almost doubled in three years to 27 per cent, according to the latest Thomson Reuters Extel survey of fund managers, published in June. That seems excessive, putting corporate access on a par with the amount spent on trading and execution.
True, there may be value in meeting lesser-known companies that analysts tout as the next investment gem. Fund managers rated corporate access as the third most important out of seven categories of research, Extel says. But the biggest fund managers rarely need an investment bank to provide this service. Most boards would find it hard to turn down a direct request for access from the likes of BGI, Fidelity or State Street – particularly where they already underpin the company's share register.
The FSA is expected to review the way in which dealing commissions are divvied up next year, but in the meantime has effectively banned the industry from using client money for corporate access, market data services and preferential treatment for IPOs, a recent report by the Centre for the Study of Financial Innovation points out.
The move hurts big brokers, who will lose a source of advantage over smaller independent boutiques. It also kicks asset managers, which may have to use their own management fees to pay for these services at a time when returns are feeble.
Right now, the equities business needs this like a hole in the head. Global revenue in cash equities at 10 of the largest investment banks was down 25 per cent to $7.8-billion (U.S.) in the first nine months of the year, according to analytics provider Coalition. The FSA's corporate access crackdown rubs more salt in the wound for the creaking business model.