The FCA consults on the proposed changes to Investment Research payments

The consultation paper comes as a result of recommendations made by the Investment Research Review (IRR). The IRR is an independent panel created out of the government’s Edinburgh Reforms, which were a broader set of policy initiatives designed to ensure that the UK’s financial service sector is competitive on the global stage. 

The proposal aims to allow firms to pay for investment research in a bundled manner, similar to pre-MiFID II rules, increasing access to research and improving liquidity in UK capital markets. Previously, the introduction of the unbundling policy in 2018 was seen as one of the biggest challenges for the asset management industry to prepare in anticipation of MiFID II. 

The current options available for UK asset managers to pay for investment research are: 

1. Creating a separate Research Payment Account (RPA) in which specific research charges are agreed with and recharged to each client accordingly, or  
2. The investment manager directly funds the cost of the research payments, and the costs go through the profit and loss account of the investment manager  

The proposal would offer a third option for firms to purchase investment research. The new option is to re-introduce a bundled style approach meaning firms would be able to make joint payments for third-party research and execution services. However, firm’s opting for the new bundled approach will also be required to act within the ‘guardrail’ provisions that the FCA are proposing. The proposed guardrails are as follows: 

• A formal policy is in place that describes the firm’s approach to bundled payments 
• An agreement is in place with research providers on the methodology for calculating and separately identifying the cost of research 
• Firms are to operate a structure for the allocation of payments between research providers, including independent research providers
• Firms are to put operational procedures in place for the administration of accounts that are used to purchase research  
• Firms are to prepare a budget to establish the amount needed for third party research, reviewed and renewed at least annually 
• Firms will need to develop an approach to allocate bundled research purchased across their clients 
• Periodic assessment should be carried out on the value, quality, use and contribution to investment decision-making of the research purchased 
• Disclosure should be made to clients on the firm’s use of bundled payments
• Periodic assessment is required to be carried out on the value, quality, use and contribution to investment decision-making of the research purchased 
• Disclosure is required to be made to clients on the firm’s use of bundled payments

The FCA confirmed a key aim of the proposal is to increase costs efficiencies and value for money within the industry. It is also worth pointing out that the bundled approach is more aligned with the rules governing research payments in other major jurisdictions, making it easier for asset managers to buy research in a similar way across borders.   

The deadline for responding to the FCA on the consultation paper was 5 June. The FCA has indicated that they intend to publish the final rules in the first half of 2024.