We summarise our findings from a review that analysed dealing commission expenditure across 31 investment managers (covering asset managers, wealth managers and host-authorised corporate director providers) between 2012 and 2015.
August 2025 update: This review is historical. See our what we publish[1] page for more information and current views.
We visited 17 of these firms to assess their dealing commission arrangements, including how they had responded to the examples of good and poor practice from our discussion paper[2] on the use of dealing commission regime[3], published in 2014.
This review follows a thematic review of conflicts of interest in asset management firms[4] (PDF) published by the FSA in November 2012 and a policy statement on the use of dealing commission rules[5] published in May 2014. These set out our expectation that firms spend customers’ money with as much care and attention as if it were their own and changes to the use of dealing commission rules (COBS 11.6).
What we found
The majority of firms we visited are still falling short of our expectations. This includes how firms:
- assess whether a research good or service received is substantive
- attribute a price or cost to substantive research if they receive it in return for dealing commission
- record their assessments to demonstrate they’re meeting COBS 11.6.3R and are not spending more of their customers’ money than necessary
We identified poor practices at the majority of firms we visited and several could not demonstrate meaningful improvements in terms of how they spend their customers’ money through their dealing commission arrangements.
At the extreme end, some continued to use dealing commission to purchase non-permissible items, such as corporate access and market data services, contrary to our rules. Where we identify breaches of our rules, we will consider further action, including referring firms for further investigation.
We also found some practices have improved since our previous work on this topic, as explained below.
Paying for research
A few firms in our sample now cover the cost of externally produced research from their own resources rather than using dealing commission. These firms take care to ensure that the dealing commission they continue to pay are for execution services only and paid at genuine execution-only rates.
Firms that have adopted this practice:
- mitigate the conflicts of interest associated with using dealing commission to pay for external research
- provide greater transparency about the charges their clients pay
- are better placed to demonstrate that their dealing teams only execute trades with counterparties that provide best execution
- are fully incentivised to only purchase research that represents value for money
Other firms have adopted processes that demonstrate careful consideration and control around how they spend dealing commission. They have driven material reductions in the commission they spend on research through improved management and oversight.
If more firms implement either of these approaches, it should drive better quality research across the market.
Research budgets
We identified a range of practices, with some showing little thought or consideration behind how research budgets are set and managed.
Budgets are frequently linked to historical research spending levels - a factor of past trading volumes rather than an assessment of the amount of substantive research required.
Those firms without any form of budgeting have research spending levels closely correlated to trading volumes. While the efficiency of budgets needs to be improved, 79% of organisations in our sample in 2015 used research budgets compared to just 34% in 2012, so some progress has been made in this area.
Implementing budgets should introduce discipline around how much substantive external research a firm requires and how much of their clients’ money they spend on it.
However, we identified several instances where firms with budgets did not limit research expenditure to these levels, with no satisfactory explanation as to why this was the case. These practices could result in a breach of our rule which requires firms to act in the best interests of their clients (COBS 2.1.1R) and our rule on the use of dealing commission (COBS 11.6.3R).
Other firms had budgets which were significantly greater than their periodic research expenditure. While under-spending compared to budgets will have benefited their customers, we think it should have prompted a review to question whether research budgets were unnecessarily large - but this review was often missing.
Greater scrutiny around budgetary requirements, including a comprehensive approach to valuing research, could result in lower costs and/or a more efficient use of dealing commission. This in turn may lead to better returns for investors.
We did find examples where firms had successfully implemented considered budgets based on different factors (for example, an estimate of the cost of producing research internally or acquiring it from an independent research provider).
We also saw instances where proposed research payments were benchmarked against various external sources to validate that investors were getting value for money and firms that switched to execution only trading as soon as periodic research budgets were met.
Research polls and voting
A number of firms had adopted a research poll where analysts and portfolio managers allocated votes that generated research payments based on percentages of the total research pot rather than specified monetary amounts.
We discovered that these firms’ spending levels were closely correlated to trading volumes. Voting based on a percentage meant that analysts and portfolio managers were typically unaware of the value they were attributing to the research they had voted for.
They were therefore unable to assess value for money and couldn’t demonstrate they were paying research providers appropriately using their clients’ funds.
Systems, controls and record keeping
Arrangements to demonstrate that only ‘substantive’ research is paid for using dealing commission (as required by COBS 11.6.5E) were generally poor or missing.
In instances where records were kept, they usually did not contain sufficient information to establish that the service received met the evidential standards for substantive research.
Challenge and validation from front line management and control functions over the compliant use of dealing commission was commonly missing. We found similar control and oversight concerns during a 2016 review which looked at how investment managers oversee their best execution obligations.
Our review identified a few firms that had implemented systems and processes where detailed information was recorded on all substantive broker interactions. They were therefore capable of explaining the rationale behind research commission expenditure decisions and could confirm that these services met the evidential criteria for substantive research (COBS 11.6.5E).
We expect to see clearly documented evidence to support the acquisition of permitted goods and services. In subsequent reviews we will also seek confirmation of boards demanding satisfactory management information on the subject. Firms are required to have adequate systems and record keeping processes (SYSC 3.2 and SYSC 9).
Conflicts of interest
The majority of firms continued to treat the receipt of corporate access from brokers as a free provision.
Where these firms also operated limited controls and record-keeping over research expenditure (as described above), this leaves them exposed to the risk that corporate access or other non-permissible services might still influence the allocation of dealing commission expenditure (ie because staff evaluating brokers’ performance might continue to vote for them without effective challenge).
Some firms failed to record details of corporate access meetings and in some cases, had to rely on estimates when responding to our questions.
These findings suggest that this potential conflict and inducement risk is not being identified, monitored or managed effectively.
In contrast, a few organisations attempted to partially mitigate the risk of indirectly paying for corporate access by paying for it from their own resources.
Further issues
We were concerned to see that some firms with overseas operations and those that delegated investment management services failed to implement controls and oversight structures to ensure the activities they outsourced complied with our rules. Firms which operate ‘global’ commission models must meet our requirements on their investment management activities that take place in the UK, including COBS 11.6.
Although many firms have embraced the use of commission sharing agreements (CSAs), the majority of research commission in our sample in 2015 was still spent on a ‘fully bundled’ basis (ie the executing broker was also the direct research commission recipient).
In some instances, firms were also unable to demonstrate that research and execution were treated 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.
Our conclusions
More work needs to be done by investment management firms to ensure they spend their customers’ money with as much care and attention as if it were their own.
Despite some progress being made, much of the poor practice we’ve highlighted previously is still commonplace. This is concerning considering the majority of the rules on the use of dealing commission have been in place for over a decade.
Firms that have paid closer scrutiny to this area have generally seen a reduction in the dealing commission they spend on research, which feeds directly into better investment performance for their consumers.
Such improvements, if replicated across the market, will also help to enhance the attractiveness of the UK investment management sector for potential investors.
Next steps
Given these findings and the implementation of MiFID II, we will continue to focus on the use of dealing commission.
Where we identify breaches of our rules or principles, we will consider appropriate action, including more detailed investigations into specific firms, individuals or practices.
As mentioned above, we also recently completed a follow-up review looking at how investment managers oversee their best execution obligations. Similar to our dealing commission review findings, the best execution assessment found that most firms failed to take on board the findings of our 2014 thematic review.