Changing Regulations for Bundling and Soft Commissions in the UK & US

The UK’s Financial Services Authority's proposals for soft commissions and bundling will radically change the UK's trading landscape. These changes would benefit investors but could harm the UK’s financial services industry due to a lack of regulatory alignment with other major industry centers. The UK brokerage industry in particular could lose revenues of up to £615 million annually.

In a new report, "Changing Regulations for Bundling and Soft Commissions in the UK and US,"Celent analyzes the proposals and potential impacts of a new Financial Services Authority report on bundling and soft commissions.

The FSA’s proposals are well-intentioned and serve their purpose of protecting investor interests. Under the FSA's proposals, fund managers must substantially change how they charge their clients for goods and services that are currently paid for with trading commissions. According to the report, investors will benefit from the FSA proposals at the expense of UK brokerage firms. While £174 million could be returned to UK investors, UK brokers could lose up to £615 million, or 27% of UK commissions. In the short term, fund managers will be forced to provide greater cost transparency than their international competition. This transparency could set a new model for fund managers globally as large institutional investors take interest in the new regulations.

In the US and other countries, financial regulators are unlikely to follow the UK in eliminating soft commissions and mandating full transparency for bundled services. Instead, regulators are likely either to require increased supervision or to do nothing, encouraging UK financial services firms to consider moving their operations abroad, with implications for the country’s standing as a global financial center.

Independent research providers and other vendors that receive payments from soft commissions will suffer under the new regulations. Fund managers will be forced to weigh the value of all research, both bundled and independent, as a cost from their management fees. Large brokerage firms are likely to have an easier time as research can be seen as free marketing material, while bundling trading commissions with IPO access will still be permitted. Independents, however, will have to make their case to a much more cost-conscious audience.

"The UK Financial Services Authority is benefiting the world’s investors but may be damaging their own financial services industry," comments Octavio Marenzi, Celent's managing director and co-author of the report. Marenzi adds, "The economic misalignments created by bundling and soft commissions are real, but by going it alone, the FSA may inadvertently damage a domestic industry already struggling with a longstanding bear market."