Watchdog backtracks on proposals to force change on fund managers

The Financial Services Authority has backtracked on its controversial proposals to force through sweeping changes to the way fund managers pay for brokers' services.
John Tiner, chief executive of the FSA, yesterday signalled that the watchdog was now minded to work with the investment industry on the vexed issue of "bundling", the practice where fund managers automatically pass on to investors the costs of broker services such as share trading and research.
He told delegates at the National Association of Pension Funds annual investment conference: "This is a big issue for the industry and it would be, wrong for us to steam-roller ahead."
Many respondents to the FSA's consultation paper on the topic "felt that market-driven initiatives can deliver the necessary transparency and accountability," he added. The FSA's initial proposals included moves to outlaw bundling, which critics claim makes costs opaque and distorts competition.
The investment industry has lobbied hard against the proposals, arguing that the brokers on which smaller investment houses rely for their research will cover fewer companies, and that fund management business will be driven offshore. Mr Tiner said the FSA was talking to the US Securities and Exchange Commission and hoped there would be "convergence" on the issue.
Mr Tiner told the conference in Edinburgh that the FSA had dis
cussed with lobby groups such as the NAPF and the Investment Management Association the "possibility of enhancing the voluntary disclosure code". This would have the effect of making costs more transparent.
Dick Saunders, IMA chief executive, praised the FSA's new stance on bundling. He said: "We welcome the FSA's intention to work with the industry. We are happy to work with them to address the issue on unbundling so that there is no need for detailed new regulations."
The FSA, though, is committed to reforming "softing" - the discredited practice of paying commissions in kind which critics claim is a form of kick-back.
Mr Tiner also revealed the results of a three-month investigation into whether investments
funds in the UK were engaging in late trading and market timing. The market timing scandal, with traders exploiting stale fund prices across time zones, has rocked the US mutual industry.
Mr Tiner said the FSA had found no evidence of late trading, the illegal practice where traders deal after the market has closed. It had discovered some instances of market timing, he said, though "there is no evidence that market timing is widespread or that it has been a major source of detriment to long term investors". The FSA will provide more details in a statement today.
Mr Tiner said the FSA was reviewing the use of projection rates used in financial literature to illustrate potential investment returns. The FSA would publish a discussion paper in June.