Outlook: City watchdog sounds the death knell for soft commissions

The broking and fund management industries have had a miserable time of it this past three years and now here comes the Financial Services Authority to make it that little bit worse. Prompted presumably by the Iron Chancellor, the FSA has been getting its teeth into soft commissions, or the bundling of services such as broker's research into the fees charged for stock trading. The Consultative Paper issued yesterday had all the hallmarks of something that was more of a fait accompli than a consultation, and it seems rather unlikely that the City will persuade the FSA to climb down from the paper's key recommendations.

None the less, these seem in the main to make sense and given that the already threatened alternative was a fully blown Competition Commission inquiry, fund managers and brokers might count themselves as getting off lightly. Under the proposals, payment through commissions for market pricing and information services, such as dealing screens, is to be banned entirely. According to the FSA, these account for up to 57 per cent of soft commission credits. The bulk of the rest is for brokers research. Here the FSA proposes that the client should be asked specifically to mandate commission based payment for research.

It's hard to argue with either proposal. It is plainly wrong that fund managers should agree to spend a defined amount with a particular firm in return for services such as "free" dealing and information screens, for it creates self evident conflicts for the fund manager between his own interests and those of the client. Much brokers' research is a waste of space and its value to fund managers when shared simultaneously with everyone else is in any case questionable.

Since Paul Myners published his report questioning the soft element in commission payments, the tradition of soft commission has been strongly in the decline. But it is still big and important and there is no doubt that the sort of bans and restrictions suggested will have a profound effect on some firms. Dealing can be expected to concentrate in the hands of big, execution only firms, while the measures will hasten the development of independent research houses, and for more research to be conducted internally by fund managers.

Whether they will also significantly improve the return that retail and wholesale investors derive from active fund management is a little more doubtful. The sums involved are not trivial. According to the FSA, some 40 per cent of the £2.3bn paid by fund managers in brokers' commission goes on additional "soft" services like research. Unfortunately, charges squashed down in one area have a nasty habit of pushing back up in another. I doubt very much that the FSA proposals will lead to an overall reduction in charges to the client. On the other hand, if it improves the quality and independence of research, and reduces the herd like approach to investment that the big houses presently encourage through their research, that in itself will be no bad thing.

Suckers' rally?

The war rally in stock markets continues apace, apparently oblivious to the warnings that winning is the easy bit, it's during the subsequent peace that the real trouble begins. Stock markets are not entirely irrational in their behaviour, and although the upsurge of the last few weeks is largely a sentiment driven phenomenon determined as much by the latest CNN bulletin as anything else, prospects for the real economy may genuinely have improved in recent days.

"Geopolitical uncertainty" is one of the main reasons for the current paralysis in business activity and confidence, and to the extent that it is now being removed, things ought to start picking up again. The sudden downturn in consumer confidence that was a feature of the build up to war may also start to reverse now that the outcome is not in doubt.

More significant still, coalition's successful prosecution of the war may have underwritten a "lowish" oil price into the indefinite future. That's not brilliant news for Saudi Arabia, Russian and others that rely on oil prices above $20 a barrel for their economic prosperity, and in time it could ferment new outbreaks of geopolitical uncertainty, but in the short to medium term it's a boon to the world economy. True enough, the war doesn't solve the very considerable post bubble difficulties that all developed economies find themselves in, but victory may ease the pain a little.

None the less, I'm still a little bit worried about the sustainability of the rally. Whatever happens, there will be no rapid bounce back in the economy and I continue to believe the bear market of the past three years has done semi-permanent damage to the cult of equity. Equities look good value when the yield is about 5 per cent, but they are not so obviously appealing at 4 and 3 per cent.

The investment lesson of the boom and bust of recent years is that when the going gets tough, shares are a much lower form of life than bonds. It is the share capital that is wiped out first in the order of creditors. As a consequence, investors will routinely demand a higher yield from equities to compensate for the higher risk they run by holding them.

Five per cent for a blue chip sounds about right with inflation at 2.5 per cent. It's a bit higher than a ten year gilt, but it is also riskier too, if only because directors seem to behave more like proprietors these days than employees they are, taking big liberties with the shareholders' money. In the end, equity is no more than the sum total of what it pays out. Investors may be forgetting themselves again in this latest, sentiment driven rally.

BT logo change

I've been long enough in this business to remember British Telecom's last corporate logo change, when the dancing piper was first introduced. The rebranding was a much grander and costlier affair than the present one, an image change deliberately designed to trumpet an organisation supposedly at the forefront of international developments in its industry, a corporation with a growing and global reach. The opprobrium that greeted the £50m cost of re-painting all the BT vans, changing the letter head, and all the rest, was like water off a duck's back to a company which though still quite widely despised domestically was beginning to think itself a class player on the international stage.

It's always best to listen to what ordinary people think, and the dancing piper has apparently long regarded as a symbol of arrogance, like BT blowing its own trumpet. Other images that come to mind include the Pied Piper of Hamlyn, leading his shareholders to oblivion, but that perhaps would be to credit BT with too much cunning and ingenuity. Another possibility is that it simply stands for a state of drunken abandon. In any case, the age of the dancing piper was not a distinguished on in BT's history. The new image is meant to stand for the core values of staightforwardness, heart, helpfulness, inspiration and trustworthiness. Rather unfortunately, the acronym works out as "shhit".

To be fair, the new is definitely an improvement on the old. The prancing piper always looked too much like a hybrid of the Tory and Labour Party logos to succeed in presenting a credible image. The new logo, a globe surrounded by coloured plates, has been used twice already, once for Concert and more recently for BT Openworld, and will cost a comparatively inoffensive £5m to implement.

BT insists that the new logo can be seen as representative of six continents united by communications, the six bits of BT coming together as a whole, and some such other waffle. Personally I doubt whether people will read anything into it at all. Logo changes are often indicative of disaster to come, the most notable case being British Airways' famous ethnic tailfins. BT's prancing dancer fell into much the same category. But this one probably succeeds in marking a break with the arrogance of the past.

jeremy.warner@independent.co.uk