The UK Financial Conduct Authority (FCA) has announced new rules around payment for research that re-introduce an optional element of rebundling.
Released on Friday, the watchdog’s new rule introduces a new payment option for research and follows an industry consultation period that began in April.
Under the new proposed payment option, the UK buy-side will be able to facilitate joint payments for third-party research and execution services, provided said firm meets requirements.
Read more – FCA tables re-bundling to support more ‘flexible’ approach to research
Today’s proposals stay very close to the proposal put forward in the consultation paper but do also include some minor changes on the back of industry feedback.
“They [FCA] have made changes in a few areas which definitely increase the likelihood of the buy-side being tempted to try to get these costs off their own P&Ls and potentially become more open to consuming new research,” Substantive Research’s Mike Carrodus tells The TRADE.
“For example, many interpreted the proposed rules in the CP as requiring “strategy level budgets” which would have been a dealbreaker for some asset managers – this has been clarified and removed. Allocating a budget down to individual teams is common practice, but for some asset managers who consume and repackage research insights centrally this would not have been an option.”
The FCA’s new rules also mean firms will not have to disclose their top providers in terms of payment amount – something highlighted by participants in the consultation. Instead, they will have to provide information around the breakdown of types of provider in the budget.
Also included in today’s new rules is a softening in how firms ensure separately identifiable research charges versus execution costs. The FCA is now only asking for firms to have arrangements in place that evidence how the separation is done more broadly.
Despite some calling for it, the FCA has opted not to re-implement ‘full rebundling’.
“Full bundling would lead to opacity of prices paid for research services, challenge the ability to compare prices paid across research providers, and not preserve competition in the separate markets for research and trade execution,” said the watchdog in its findings.
“We believe that Mifid II introduced a level of discipline and transparency which exceeds that of fully bundled arrangements, and we want to retain the benefits that have been achieved.”
The new payment option is not mandatory. From 1 August onwards, the FCA has suggested that firms must ensure they comply with requirements if they wish to use the new option.
“The FCA has provided greater flexibility which will encourage many asset managers to now explore whether their client bases will accommodate a small additional cost to their annual fees in order to align with these changes,” added Carrodus. “However, the regulator is not apologising for Mifid II’s research rules, and has clearly ruled out any return to a fully bundled world. Now we have regulatory clarity, we will wait to see if a group of early adopter asset managers emerges to test the commercial dynamics of this transition!”
Read more – In conversation with… Substantive Research’s Mike Carrodus
Research was unbundled as part of Mifid II in 2018 due to various industry concerns surrounding spending on duplicative or low-quality research.
The FCA began consulting with the industry on potential rebundling options following the conclusion of HM Treasury’s Investment Research Review (IRR) which concluded that unbundling requirements had had “adverse impacts” on the provision of investment research in the UK and subsequently the UK economy.
The IRR also concluded that unbundling requirements were potentially reducing UK asset managers’ access to global investment research and that this was putting them at a competitive disadvantage against international peers.
European regulators have also been reassessing the payment for research landscape as of late following similar research into the impacts of Mifid II.
Following its own findings, the Bloc is also introducing new legislative adjustments to the Mifid II unbundling rules, also in the form of a new payment option, to bundle research payments with execution.