Fund managers face soft commission ban

Outgoing FSA chief Davies lambasts Consumers' Association for 'irresponsible' endowments campaign

The Financial Services Authority is planning to push ahead with tough new rules to outlaw soft commissions, under which brokers provide services to fund managers bought from third parties in return for an agreed volume of dealing commissions. Such services are typically online dealing and information systems.

Despite fierce lobbying from the industry, which claims that banning the practice might drive fund managers offshore, the FSA is determined to stick to its guns in ruling that managers would no longer be able to use soft commissions.

The FSA also plans to make the related practice of "bundling" more transparent. Bundling refers to the provision of other in-house services, mainly investment research, within the dealing commission.

Under the new rules, fund managers would no longer be able to incur costs for services additional to dealing without the customer's express agreement.

News of the FSA's intransigence will dismay industry leaders, many of whom believed they were winning the argument against a crackdown. The new rules will undermine the cosy relationship enjoyed between some fund managers and a select group of favoured brokers. In the longer term, they will also increase the pressure for separation of research from dealing and other investment banking services.

Some brokers believe the new rules could all but destroy the provision of brokers' research, costing hundreds of analysts their jobs at a time when the industry has already undergone severe cutbacks.

In an interview with The Independent, Sir Howard Davies, who bowed out as chairman of the FSA last week, said that a six-month consultation had shown widespread support for the proposals among institutional investors.

The consultation is not yet at an end, and Sir Howard acknowledged that the decision was one for his successor, Callum McCarthy. But he said that the practice of softing was highly likely to end, while the debate on bundling was not moving in the fund managers' direction.

"We are prepared to look at issues, such as whether unbundling would affect the provision of independent research," Sir Howard said. "But I'm not very impressed with the argument that if you told people what they were paying for, then they would cut back on a service which is vital to their interests. It's a not knowing what's good for you argument. Investors are capable of deciding for themselves."

Sir Howard said that there was a parallel move against softing and bundling in the US, which undermined the argument that the City's position could be weakened if unbundling was enforced here but not in rival financial centres.

On a separate issue, Sir Howard called the Consumers' Association "irresponsible" for encouraging holders of endowment mortgages to appeal for compensation. He described the growing mountain of such claims as "extremely worrying" and "highly damaging" to the interests of non claimants.

"The approach being taken by the Consumers' Association doesn't take account of the fact that it is other policyholders that have to shoulder the costs of compensation," Sir Howard said. "Indiscriminate compensation claims produce costs running to hundreds of pounds per case, and more if it gets as far as the Ombudsman."

Poor record keeping has damaged the industry's ability to resist the expected tidal wave of claims. Endowment providers and independent financial advisers can be required to give compensation in cases where it cannot be demonstrated that sufficient risk warnings were given.

The CA, which once recommended low-cost endowments as the best way of repaying a mortgage, devotes a large proportion of its website to encouraging policyholders to sue for compensation.