European rules that will forbid broker commissions from being used to pay for investment research and force banks to disclose how commissions are being spent could have a knock-on effect in Asia, argues a senior lawyer.
This is because institutional investors outside Europe may ultimately demand this sort of level of transparency from banks in their own markets, said Leonard Ng, co-head of the regulatory practice in London at Sidley Austin.
EU dealing commission rules state that EU investment managers cannot accept research and execution unless they are priced and paid for separately.
It must be clear which part of the payment is for execution and which part for research. These rules, which are contained in the Markets in Financial Instruments Directive 2, will come into force on January 3, 2018 and govern the provision of investment services into EU countries.
As a result of this, for an EU investment manager to accept research from an Asian bank, the bank will have to break out the research from the execution costs, noted Ng.
“Asian banks dealing with European managers are likely to have to provide a lot more granular details than they have in the past,” he added. “If Asian asset managers – or their institutional clients become aware of this – they might want a similar level of detail from their Asian banks.”
The issue is that Asian investors will know from their European asset managers exactly how much of the fees they pay go towards execution and research, said Ng, but they won’t get that information from their Asian managers.
“If an investor finds that an Asian fund manager he uses is dealing with an Asian bank, which is breaking down research and execution costs for European managers, he might decide he wants that transparency as well,” said Ng. “Because the banks should have that breakdown; if they deal with European managers, they have to provide it.”
“One could therefore speculate that the new European dealing commission rules will have a knock-on effect on practices elsewhere,” he added. “There’s certainly reason to believe that might happen.”
These dealing commission rules came about because the European Securities and Markets Authority argues that paying commissions directly conflicts with the requirement for fund managers to provide best execution to clients, since managers are more likely to execute with brokers that have provided them with good research.