On April 10, 2024, the FCA published a consultation on Payment Optionality for Investment Research (CP24/7). In the consultation, the FCA proposes a new option for asset managers when paying for investment research, in addition to existing options.
Under the current UK rules, which stem from the legacy EU MiFID II regime, there are two ways in which UK asset managers can currently pay for investment research:
- By agreeing a separate research charge with each of their clients, with the payment for research made from a Research Payment Account (the RPA model); and
- By paying for research out of their own resources, such that research payments are a cost in the asset manager’s overall profit and loss statement (the P&L model).
In its consultation, the FCA proposes a third option that would enable asset managers to buy investment research using joint (hereafter “bundled”) payments for third party research and execution services, provided firms meet certain requirements. These requirements include relevant asset managers establishing:
- a formal policy on use of the approach;
- a budget for the amount of third party research to be purchased;
- an agreement with research providers on the methodology for calculating and separately identifying the cost of research;
- periodic assessment of the value and quality of the research purchased as well as benchmarking and price discovery of such research;
- an approach to the allocation of costs across their clients;
- a structure for the allocation of payments across research providers;
- operational procedures for the administration of accounts to purchase research; and
- disclosure to clients on the firm’s approach to bundled payments, their most significant research providers, and costs incurred.
Background and rationale
The MiFID II requirements “un-bundled” payments for execution and research services, leaving UK asset managers with a choice between the P&L model and RPA model. The policy objective behind the changes was to better manage conflicts of interest, improve accountability over costs ultimately passed to consumers, and to improve price transparency in relation to research.
Following the UK’s exit from the EU, and as part of the Edinburgh Reforms, the UK government requested that an independent panel review the investment research market. The panel published a series of recommendations in its July 2023 report, known as the Independent Research Review (the IRR report). The FCA’s consultation paper addresses “recommendation 2” of the IRR report.
However, the FCA does not address the other relevant recommendations, in particular, allowing greater access to investment research for retail investors, clarifying aspects of the UK regulatory regime for investment research and reviewing the rules relating to investment research in the context of IPOs. The FCA has said that it will consider these recommendations in due course, but has not taken this opportunity to give an update on its anticipated timing for doing so.
The FCA hopes that re-introducing a ‘bundled’ payments model – with guardrails – would continue to protect consumers as MiFID II aimed to, while providing other benefits, including potentially stimulating greater research coverage of UK issuers.
Such benefits may also include enabling firms to purchase research from other jurisdictions (in particular from US broker dealers, who may face barriers to accepting “unbundled” payments), as well as potentially fewer barriers to entry for smaller firms paying for research, given how complex and resource intensive the RPA model is, and the start-up costs associated with buying research using firm funds under the P&L model.
Next steps
The FCA invites comments on its consultation by June 5, 2024. If it chooses to proceed with these proposals, it aims to publish any rules or guidance in a policy statement in the first half of 2024. To ensure alignment on research rules across investment firms and collective portfolio managers, the FCA plans to set out rules for fund managers, including UCITS managers and AIF managers under COBS 18, in a separate consultation later this year.
As mentioned above, the IRR report made a wider set of recommendations than is dealt with in this consultation. The FCA will turn to dealing with further recommendations in the IRR report “in due course”.
The FCA has indicated that if implemented, it will conduct follow-up supervisory work to measure the success of the policy via up-take of the new option. It intends to publish the key indicators it would use to monitor success and related data collection requirements as part of any future policy statement.
Finally, the FCA notes that even with the guardrails proposed, there is risk that the new “bundled payments model” reintroduces opaque charging structures, overconsumption of research and conflicts of interest. In such a case, the FCA notes that further guidance and more prescriptive standards would follow.
Tom Callaby is a partner in the Financial Services team and Ash Saluja is head of Financial Services & Products, CMS London.
