An assessment of soft commission arrangements and bundled brokerage services in the UK

Oxera was commissioned by the Financial Services Authority to examine the practice of soft commissions and bundled brokerage services, to establish whether they pose regulatory risks and/or competition problems.

In-depth interviews were conducted with pension fund trustees, fund managers, brokers, research companies, industry experts and regulators, to obtain insight into competitive conditions in the markets concerned, and into the various horizontal and vertical relationships and contractual arrangements between market participants. This was followed by an extensive questionnaire for pension funds, fund managers and brokers. The principal objectives were:

to obtain quantitative evidence to underpin the economic analyses of competition, bundling and soft commissions;
to estimate the order of magnitude of bundling and soft commissions;
to test various hypotheses and statements that have been made about these practices.

In addition, Oxera reviewed the literature on soft commission arrangements, and examined and compared regulations on soft commissions and bundled brokerage services in several major countries.

The Financial Services Authority used the research findings in formulating policy proposals, and subsequently commissioned Oxera to perform a cost–benefit analysis on the proposed set of new rules (see Related items).

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A social time preference for use in long-term discounting

Oxera prepared a comprehensive review of the literature on social time preference rates for HM Treasury’s revised Green Book, published in January 2003.

It set out the cases for and against a change from a constant social discount rate to one that declines over time, illustrating the results with simulations and examples from transport, climate change and nuclear policy. The Treasury then adopted a declining social discount rate using the rate of decline proposed by Oxera.

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Interoperability and horizontal markets in European digital television

Oxera was commissioned by the European Commission to investigate the issues surrounding the introduction of interoperability of interactive services and the creation of horizontal retail markets for equipment in the context of digital broadcast services in Europe.

The study involved an economic analysis of the European television market, identification of technological gateways in digital television and the development of policy options to introduce interoperability and horizontal markets.

In addition, the study addressed the related issue of the degree to which the market is likely to deliver certain types of digital services or products and whether there are any market failures and bottlenecks that need to be addressed. The final report was published in March 2003, and formed a significant input into the formulation of policy to govern the process of standardisation and interoperability in the European digital broadcast market.

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The role of custody in European asset management

Following the research report on the ‘Risks and regulation in asset management: is there a role for capital requirements’, the European Asset Management Association (EAMA) commissioned Oxera to undertake research specifically investigating custody arrangements in the asset management industry, the report for which was published by EAMA. The aim of the custody project was to evaluate the extent to which external custodianship of client assets protects investors from operational risks.

As part of the research, Oxera looked into the services provided by custodians, and the regulatory and contractual responsibilities of custodians in relation to asset managers and their clients. In addition, a questionnaire was sent to asset managers and custodian banks across Europe, to obtain further information about the level of client protection afforded by current custody arrangements.

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The Capital Structure of Water Companies

The Oxera report on capital structure, prepared on behalf of Ofwat, examined the question of how high levels of gearing affect companies' cost of capital, the potential social consequences of highly leveraged utilities, and how regulators should respond in arriving at their gearing assumptions at periodic reviews.

The study explored the various theories of capital structure determinants, the drivers of increased gearing in water, and the potential effects on the cost of capital for those companies pursuing the restructuring route. On balance, the study urged caution, and that, in making assumptions about the capital structure of companies, regulators should not place too much weight on recent water company restructurings.

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Clearing the air: public transport and cleaner vehicles

This report provided an industry reference on the environment, fuels, and vehicles and support mechanisms for the UK public transport sector.

It covered new low-emission engine and fuel technologies in the bus and rail sectors, and included:

the current state of play regarding emissions reduction across the transport sector;

modal shift and technological change to meet lower-carbon policies;

EU and UK environmental policies, including those on low carbon, air quality and noise, for bus and rail, as well as the effects of private vehicle policy development and voluntary agreements;

environmental reporting by public transport companies;

a technical review of cleaner fuels and engine technologies (including exhaust after-treatment, electric and hybrid engines, and hydrogen and fuel cells);

EU and UK support mechanisms, and UK fiscal policy, including discussion areas for policy and change.

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Regional renewable energy assessments

Oxera reviewed the economic and technical aspects of the UK regional assessments of the potential for renewable energy generation in 2010 for the Department of Trade and Industry and the Department for Transport, Local Government and the Regions.

In particular, we examined whether the proposed regional targets in aggregate were sufficient to meet the government’s target, and whether the assumptions made were consistent and reasonable, with consideration by Arup Economics and Planning of the planning issues.

Key conclusions from the report were that the 10% Renewables Obligation target is more or less reached under the high targets proposed in the regional assessments, but not under the low targets. Half of the total of the regions’ assessments consisted of on- and offshore wind, whereas landfill gas and biomass make up most of the remaining half. However, those technologies were also the most problematic in terms of obtaining planning consent.

A more positive planning system would assist the achievement of the national target. The planning system may take several years to incorporate the regional targets into forward plans, and hence into development control decisions. Nevertheless, there were actions that government could take which would have an immediate effect, and which would also deliver improvements in the future.

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Flood defence spending review

Oxera was commissioned by the Department for Environment, Food and Rural Affairs (Defra) for a steering group consisting of the Treasury, the National Assembly for Wales, and the Environment Agency to review the arrangements for funding flood defence in England and Wales.

The first study of its kind for over a decade, the project collated data from across government, evidence from interviews and published literature, and prepared new economic analysis from first principles. It contained a comprehensive description of existing flood defence funding and operational arrangements, and presents alternative funding arrangements together with a discussion of their pros and cons. The steering group said about the report:

[we] were grateful to Oxera for the deep analysis which underpins their report. They explored a number of issues in depth and, owing to their comprehensive and informed study, the Steering Group’s task in identifying and evaluating potential candidates for further funding options was facilitated. In addition, Oxera’s findings and views on the current funding arrangements have provided useful material for the Group in producing its assessment of the existing institutional arrangements for flood and coastal defence in respect of both funding, strategic management and operations’. (Defra (2001), ‘The Flood and Coastal Defence Funding Review: Report to Ministers by the Review Steering Group’)

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Fundamental review of the generic drugs industry

The Department of Health commissioned Oxera to undertake a fundamental review of the supply and distribution of generic medicines. This review arose from the Department’s concerns about the generic medicines market in the UK, and, in particular, the significant price rises in an unusually high proportion of generic drugs during 1999. The aim of the review was to provide the Department with remedial and radical options for reforming the existing market structure and government procurement arrangements, in order to deliver the Department’s objectives.

Oxera undertook a high-level analysis of the generic manufacturing and supply industry, and the wider pattern of relationships for wholesaling and retail of medicines for the National Health Service (NHS). This involved substantial primary research, including around 200 interviews with companies and regulators in the UK, the USA, the Netherlands and New Zealand.

The study covered a detailed investigation of ownership links, an analysis of operational characteristics at all levels of distribution and supply, and an examination of how the NHS reimbursement arrangements and distribution margins affect participants’ behaviour. It explained the incentives at each stage in the distribution chain and considered how these are changing through time. The first stage of the report developed a set of remedial and radical reform options for the distribution and supply of generic medicines. The second phase focused on investigating the working arrangements for the preferred options.

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Impact of stamp duty on the real economy

The London Stock Exchange commissioned Oxera to examine how the abolition of the UK stamp duty on equity transactions would affect the cost of capital and investment levels of UK publicly listed companies. The report drew on a variety of methodologies to estimate the potential impact of changes in the stamp duty regime.

In particular, it incorporated:

available academic literature on the impact of transaction costs on share prices and the cost of capital, as well as the relationship between the cost of capital and investment;
new research conducted by Oxera on the impact of changes in the stamp duty regime;
knowledge acquired through interviewing a large number of practitioners.

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