The City watchdog has pledged a crackdown on fund manager charges after finding firms have been bending the rules to pass costs on to clients.
Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), launched a review of current rules he said were failing to prevent poor practice in the £5.4 trillion asset management sector.
He said the regulator had uncovered inherent "flaws" in the system that were allowing fund managers to include the £3 billion annual cost of third party research in their commission charges.
In a speech at the FCA's asset management conference in east London, he told the industry it must pay these costs out of its own funds and not client commission charges.
"Supervisors have increasingly come across evidence that the current regime does not sufficiently enhance transparency and accountability," he said.
He added: "The system is not working as intended. Wider reform is now required to address these flaws that cannot simply be addressed by incremental improvements to the existing rules."
The FCA's predecessor - the Financial Services Authority - first discovered issues with commission transparency in 2003, which led to a new regime being introduced in 2006.
It allows asset managers to make their own judgments on how to use client commissions.
But the FCA said asset managers were "pushing" the definition of research to use client commission to pay for non-eligible costs and services.
Clients - half of which are pension schemes and insurance funds - have been paying up to £500 million a year for so-called corporate access services.
It found in one example that a firm was rewarding brokers for the corporate access they provided - this saw each individual investment manager paying over £100,000 just to gain access to the management of companies they wanted to invest in.
The FCA also said firms were including financial newswire subscriptions as research.
Mr Wheatley said: " This practice transfers the firm's costs on to the client, which clearly works against the client's interests.
"This raises a concern because asset managers do not control these costs with the same rigour as costs they incur directly."
The FCA hopes to see changes made on dealing commission rules at a European level, but said it would overhaul UK regulations in the meantime, with help from the asset management industry.
It plans to launch a consultation paper next month.
Daniel Godfrey, chief executive of the Investment Management Association, said the group had been conducting its own research into dealing commission for "some months" and hoped to publish findings in the new year.
"Our clear objective is to ensure we deliver the greatest possible value for money, transparency and accountability to our customers and we will explore all possible avenues to make sure we do just that," he said.