FCA to Permit Research Bundling

Summary

The Financial Conduct Authority (FCA) is seeking views on proposed rules that would allow asset managers to opt for bundled payments for third-party investment research, reversing a significant aspect of the UK’s implementation of research rules under the Markets in Financial Instruments Directive (MiFID II).

The proposed rules outlined in the FCA’s Consultation Paper CP24/7 will allow for a new bundled payment option alongside existing payment options (i.e. payment by the asset manager out of its own resources or by the fund through the use of a dedicated research payment account (RPA)).

The proposals are designed to be compatible with rules governing research payments in other major jurisdictions, including the United States, making it easier for UK asset managers to access research in the same way across borders.

Firms in Scope of the Proposals

The FCA proposes to permit asset managers to use unbundled research by including a specific carve-out from the MiFID II inducement provisions contained in Chapter 2.3B of the FCA’s Conduct of Business Sourcebook (COBS), which currently only permit asset managers to receive investment research if that manager pays for the research via its own balance sheet or a RPA.

The proposed exemption in COBS 2.3B would allow the following firms to make use of bundled research as a payment option:

• MiFID investment firms.
• Alternative investment fund managers (AIFMs) and management companies of Undertakings for Collective Investment in Transferable Securities (UCITS), in respect of business performed under MiFID top-up permissions, i.e. services or activities that they perform for a client other than a fund for which they are appointed as the AIFM or UCITS management company.

Notably, the FCA’s proposals do not seek to mirror the changes to research payment rules for collective portfolio managers that do not carry on MiFID business, including AIFMs and UCITS management companies.¹

The FCA has indicated a separate consultation is planned for collective portfolio managers and has indicated that its policy intention is to ensure consistency across all rules on research and inducements for investment firms and collective portfolio managers.

Conditions For Receiving Bundled Research

Under the consultation, asset managers that choose to receive research bundled with execution costs would need to satisfy certain conditions, including establishing formal policies, written agreements with research providers, structured cost allocation methods, budgeting, periodic assessments of research providers and client disclosures on their approach to bundled payments.²

Consumer Duty

The FCA also highlights that firms which are in scope of the Consumer Duty would need to consider whether their policies and arrangements for bundled research meet the requirements of the Consumer Duty.

Next Steps

The FCA has requested comments to the consultation by 5 June 2024. The FCA intends to finalise rules in the first half of 2024. Asset managers should evaluate the proposed conditions for bundled research if they intend to adopt this payment option.

^{1 The FCA’s implementation of the MiFID II research payment rules in January 2018 extended the requirements to collective portfolio managers that did not carry out MiFID business, including AIFMs and UCITS management companies. This was incorporated in a separate section of the Handbook in COBS 18 Annex 1, containing specific research and inducement rules for collective portfolio managers.}

^{The FCA’s current proposals do not seek to amend COBS 18 Annex 1. The FCA has instead indicated that it will seek to separately consult on rules to ensure aligned requirements for collective portfolio managers that are not subject to MiFID.} 

^{2 The conditions will be introduced as new rules in COBS 2.3B (COBS 2.3B.25R to COBS 2.3B.31R). In summary, the key conditions include:}

• ^{Establishing a formal policy outlining the firm's approach to bundled payments, encompassing governance, decision-making and controls.}
• ^{Entering into written agreements with research and execution service providers to define the methodology for calculating research costs separately within total charges.}
• ^{Implementing a structured approach for allocating costs among clients and distributing payments among research providers.}
• ^{Setting a budget for third-party research purchases, subject to annual review and renewal.}
• ^{Conducting periodic assessments of research price and value, including benchmarking, at least annually.}
• ^{Establishing operational procedures for the administration of accounts used to purchase research.}
• ^{Providing disclosures to clients regarding the firm’s approach to bundled payments, including if and how bundled payments are combined with other payment options, their most significant research providers and total costs incurred.}