Background
On 1st August 2024, the FCA introduced new rules for firms wishing to purchase investment research. Previously, the costs of investment research were bundled together with the costs of other services, typically execution services, provided by investment research providers, making the cost of research opaque and potentially unfair to clients. MiFID II requirements then introduced the concept of “unbundling”, whereby the costs of research were explicit and purchased separately from any other service from the provider and which were purchased either from the firm’s own resources or from a research payment account funded by the firm’s clients.
The Research Payment Account (“RPA”) option, under which UK asset managers charge investment research costs to clients, was considered by the FCA to be operationally complex and resource-intensive to maintain. Whilst most asset managers have not agreed separate research charges with clients but pay for research out of their own resources, it is primarily smaller firms that use this option, and such, firms may be less able to use the alternative option, i.e., to pay for research from their own resources. This is deemed to create barriers to new entrants or disadvantaging smaller firms and hence harming competition.
In its consultation paper CP24/7, the FCA introduced the additional option for asset managers to purchase investment research using joint payments for third-party research and execution services. This option arose from the previous UK government’s “Edinburgh Reforms”, which were intended to improve the competitiveness of UK markets, and the independent review of the investment research market that was commissioned subsequently.
One of the recommendations of the review was to consider bundling of the costs for investment research and execution services.
What has the FCA done?
In its policy statement PS24/9, the FCA confirmed that it will introduce an additional option which will sit alongside the existing options (own resources and RPA), that facilitates joint payments for third-party research and execution services. This is available on the basis that firms meet certain criteria. The changes were introduced on 1st August 2024 and the requirements are as follows:
- A written policy on the firm’s approach to joint payments, including governance, decision-making and controls;
- An arrangement that stipulates the methodology for calculating and separately identifying the cost of research;
- A structure for the allocation of payments between research providers, including Independent Research Providers (“IRPs”);
- An approach for the allocation across clients of the costs of research purchased through joint payments, ensuring its outcome is fair, such that the relative costs incurred by clients are commensurate with relative benefits received;
- At least an annual assessment of the value, quality, use and contribution to investment decision-making of the research purchased, including the reasonableness of research charges to clients;
- Disclosure to clients on the firm’s approach to joint payments;
- Operational procedures for the administration of accounts used to purchase research.
- A budget to establish the amount needed for third-party research, reviewed at least annually, and based on expected amounts needed to purchase such research NOT on volumes or values of transactions;
- Best execution is not impacted by research services (the best execution rules of COBS 11.2 continue to apply unchanged).
Any other issues to note?
The FCA is, at the same time, deleting the rule relating to investment research on small and medium enterprises (SMEs) in COBS 2.3A.19R(5)(g). This was introduced in late 2021 and allowed combined payments to purchase research on small cap companies (market capitalisation below £200 million) but has had little take-up. The new option for joint payments can apply to research on companies of any size.
Furthermore, the provisions in COBS 2.3A.19R(5)(h) to (k), which includes treating corporate access in relation to companies with a market capitalisation below £200 million as an acceptable minor non-monetary benefit (“MNMB”) for inducement purposes, is being retained.
How can Complyport help?
Complyport can support your firm in understanding and following these changes by providing:
- Regulatory Guidance: helping your firm understand the FCA’s expectations and providing expert advice on the relevant regulatory requirements;
- Documentation updates: assistance in drafting appropriate policies and procedural documents;
- Ongoing Support: providing ongoing support to ensure that your firm remains compliant as regulations evolve;
- Training: providing training sessions to educate staff on the practical requirements and best practices for compliance.
By utilising Complyport’s experience and expertise, firms can navigate the complex regulatory environment seamlessly and maintain high levels of compliance with the FCA’s rules and expectations.
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