In our post on investment research at the end of last year, we looked at how potential FCA rule changes in 2024 might alter the behaviours of asset managers when it came to paying for research. The Financial Conduct Authority’s (FCA) Policy Statement PS24/9 on the topic, published at the end of July, clarifies the new rules on payment optionality for investment research that now apply.
The key change is the introduction of joint payments for third party research allowing firms to combine payments for research and execution. Importantly, this sits alongside the current options of payments from an asset manager’s own P&L or via a dedicated research payment account (RPA). The idea is to provide more flexibility, reduce operational complexity (especially for smaller firms), and let each firm decide which approach works best for them. But with this there are some guardrails to ensure that any new payment option does not lead to undue costs being passed on to consumers, including budgeting requirements, a fair allocation of costs, transparency and disclosure to clients, and periodic assessment of the value and quality of research. The FCA believes these measures will maintain sufficient discipline and transparency, and of course secure a good degree of consumer protection.
This regulatory change more closely aligns with the features of research payment structures seen in other jurisdictions – namely the US and the EU. The aim of course is to facilitate UK asset managers’ competitiveness on the world stage, making it easier for them to access research across the globe.
As with any new policy statement there are concerns from some stakeholders on issues such as budgeting, research pricing benchmarking, disclosures, and cost allocations. Happily, many early reservations appear to have been addressed – the message now being one of focussing on outcomes, and not being as prescriptive as before.
The fact that the contents of the policy statement are broadly in line with expectations (and, crucially, took on recommendations from the July 2023 Investment Research Review publication) means that market participants have had plenty of time to anticipate changes so that plans can hopefully be implemented in 2025.
Say it quietly, but we may finally have the best of both worlds. From a research payment option perspective, we’re (mostly) back to where we were before the MiFID II adventure began; from a transparency perspective the guardrails ensure the “best bits” of MiFID II remain in place and crucially allow for flexibility when it comes to disclosure obligations.
So, to the question of what next for Commission Sharing Agreements (CSAs) in the UK? CSAs have never been explicitly mandated by the FCA, and nor are they in the latest policy statement. However, the FCA does recognise the importance of CSAs as a market mechanism to permit asset managers to allocate a portion of their trading commissions to pay for research (providing a flexible and efficient way to manage research costs), whilst at the same time allowing them to ensure adherence to their best execution obligations.
So, will their use grow in the UK? Last time, we said “maybe.” This time the answer is much closer to a certain, “yes, they will grow.” As always with these things there is a “but,” and on this occasion the but is, “by how much will CSA usage grow?”
The factors we believe will drive CSA adoption are several. Increased flexibility and reduced complexity for asset managers is always welcome, especially for the smaller firms where RPAs are very onerous. A reduction to barriers of entry is not to be sniffed at. Firms are always looking to align business practices across the regions and these new rules certainly help firms to take advantage of this. An opportunity to remove a cost from the P&L is a large carrot for the buy-side and early anecdotal market feedback seems to be positive. Of course, not all firms will necessarily adopt CSAs, but the option to do so is welcome. The FCA’s assurance that they will continue to monitor and review how the rules take hold is encouraging too.
Questions remain around who on the buy-side will be a meaningful adopter. For this to really take, the market would ideally want a large asset manager to fully embrace the new optionality, in turn encouraging peer adoption. However, said larger players may see this as a chance to put pressure on the competition (especially the smaller firms who feel the impact of paying for research far more acutely) by remaining steadfast with the P&L model.
We now have clarity around the regulations, and as interpretations and market reactions progress, Meritsoft continues to offer advanced solutions and services which support MiFID II adherence and CSA management supervision.
Click here to learn more about our single instance, multi-entity CSA solution.
Please get in touch if you would like to discuss how we can help with your requirements: MeritsoftCapMarkets@Cognizant.com
