Big investors clash on commissions

THE City's two biggest investor bodies are on a collision course over proposals to change the way fund managers charge clients.

The Association of British Insurers is ready to fire a broadside at the Financial Services Authority over plans to force fund managers to disclose commissions charged to clients when shares are bought and sold.

The ABI's attack - in response to the FSA's Consultation Paper 176, issued last April - puts insurers at loggerheads with the National Association of Pension Funds, which last week welcomed the proposed changes.

The NAPF, whose members look after the pensions of ten million workers and control about a fifth of all the shares listed in London, said the FSA's proposals would mean 'the economies of the various key players would change profoundly for the better'.

A senior NAPF insider added: 'The way that the system works at the moment is like the Great Train Robbery a hundred times over, and people don't even realise it's their money that is being taken.'

At present, funds are often charged higher commission than is necessary for buying and selling shares. In return for the extra money, fund managers receive research and other services from investment banks handling the deals - an arrangement known as 'bundled brokerage'.

Under 'soft commission' arrangements, brokers pay for fund managers to have terminals supplying information services such as Reuters and Bloomberg. In return, the funds under the manager's control pay over the odds for the execution of share sales and purchases.

The effect of the arrangement is to subsidise fund managers at the expense of their clients.

The NAPF said adopting the plan to clamp down on such deals was likely to lead to the end of soft commissions. It said unbundling broker services could secure greater accountability and transparency and allow pension funds and other service consumers to control what they are paying for.

Investment banks fear that once clients realise the size of the hidden subsidies they are paying, they will tell fund managers to seek cheaper dealing arrangements that will squeeze the money spent on research, leading to widespread City job cuts.

The ABI said it had yet to finalise its response, due by Friday, but people who have seen early drafts say it is unremittingly hostile to the FSA proposals.

The Investment Management Association, speaking for independent fund managers, is also lobbying against the changes and will outline its objections on Wednesday.