On 10 April 2024, the FCA published Consultation Paper CP24/7: Payment Optionality for Investment Research.

Background

The UK rules on investment research stem from the Markets in Financial Instruments Directive II (MiFID II). At the moment the UK rules prevent UK asset managers from purchasing research with bundled payments other than when the payment is made from a Research Payment Account. However, most asset managers have not agreed separate research charges with clients but pay for research out of their own resources, such that research payments are a cost in the asset manager’s overall profit and loss statement.

CP24/7 follows the Government-commissioned Independent Research Review which was announced as part of the Edinburgh Reforms. The Independent Research Review concluded that the MiFID II unbundling requirements have had adverse impacts on the provision of investment research in the UK, and that this might have potentially negative impacts on capital market depth and the funding available to UK companies, which may in turn ultimately hinder UK economic growth prospects. HM Treasury published the outcome of the Independent Research Review on 10 July 2023 and this contained certain recommendations that included the introduction of a Research Platform to help generate research and introducing additional optionality for paying for investment research.

CP24/7 arises from the FCA’s consideration of the recommendation that additional optionality for paying for investment research should be introduced.

Key proposals

In CP24/7 the FCA proposes:

  • A new option that allows firms that wish to buy investment research to use joint (bundled) payments for third-party research and execution services, provided that the firm meets the requirements in relation to the operation of these. The option will sit alongside those that are currently available (i.e., payment for research from a firm’s own resources and payment for research from a research payment account for specific clients).
  • The requirements for firms using this new option would include them establishing: a formal policy on the use of the approach, including with respect to governance, decision making and controls; a budget for the amount of third party research to be purchased; ongoing assessments of research value and price; 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 disclosures to clients on the firm’s approach to bundled payments, their most significant research providers, and costs incurred.

Measuring take-up

The FCA states that the success of the new policy will be measured by take-up of the new option which it can do via a firm survey or further multi-firm supervisory work. At this stage, the FCA has not set out in CP24/7 the key indicators it will use to monitor the new option. The FCA will develop key indicators as well as the data that it will be collecting, and these will be published as part of the policy statement.

COBS 18

The FCA’s policy intention is to make changes across all the rules on research and inducements for investment firms and collective portfolio managers. The FCA is aware that the proposed changes should also apply to fund managers, including UCITS managers and alternative investment fund managers under the Conduct of Business sourcebook (COBS) 18.

In CP24/7 the FCA is proposing changes to the list of minor non-monetary benefits in COBS 2.3A and the addition of payment optionality in COBS 2.3B. These proposed changes are not currently mirrored to the changes to the list of minor non-monetary benefits in COBS 18 Annex 1 relevant to UCITS management companies, full scope alternative investment fund managers (AIFMs) and small authorised AIFMs and residual collective investment scheme operators.

The FCA plans to achieve alignment in a future consultation in the course of 2024.

Next steps

The deadline for comments on CP24/7 is 5 June 2024.

The FCA aims to publish a policy statement in the first half of 2024.