The NAPF said that although the use of good quality research by investment managers benefits pension funds, it pointed out that the regulator’s thematic review highlighted misunderstandings and abuse of the rules.
The association also said that the proposed tightening of rules over conduct of business are not sufficient to ensure clients’ interests are properly protected. In light of this, the NAPF urged the FCA to press ahead with its wider review.
Paul Lee, head of investment affairs, NAPF, said: “How the cost of external research is passed onto clients should be clearly laid out and agreed as part of the contractual agreement between investment managers and their clients. The current model leads to conflicts of interest, an over-use of and over-supply of external research – not all of which is necessarily of additional value – and generates a significant lack of transparency for clients of investment managers.”
Lee called for improvements to investment managers’ disclosure to clients on their use of dealing and their management of subsequent conflicts of interest.
“This should provide clients with a simple way to quickly identify the costs carried by their investments and make it easier to assess the net return.”
“In the medium term, we encourage the FCA to give further consideration to at a minimum full unbundling of research, with explicit ex-ante pricing by research providers, including brokers, for research services offered.
"And we would like to see the FCA work towards an international prohibition on the use of dealing commission to purchase research – looking instead at how the industry can potentially move towards a cash model for research, accepting that research is a cost of doing business for investment managers.”
The association will work with the FCA and industry participants to consider to move forward.