The Financial Conduct Authority (FCA) has finalised rules allowing pooled investment funds greater freedom in paying for investment research, potentially prompting more asset managers to engage with investors about moving to client-funded research budgets.
It made the change following industry feedback to a consultation from November last year that mandated fund-level budgeting, pulling the rug out from under new rules released in July that made it easier for asset managers to pass their external research costs back onto end investors.
These only covered segregated mandates and effectively clarified that budgeting for research at a strategy-level or a firm-level would be acceptable. Many firms are understood to have said that it would be extremely challenging to attribute research value at a fund level.
“As a pro-growth regulator, we aim to improve competition in the market, especially for smaller fund managers, and make it easier for firms to buy research across borders where bundled payments are standard practice,” said the FCA.
“Following industry feedback, we extended the option for institutional investors to combine payments for research and trading services to pooled funds.”
Hugo Gordon, head of capital markets at the Investment Association, said the move to more closely align the payment optionality rules for both segregated mandates and pooled funds would help reduce operational challenges for firms.
“We will continue to work with our members and the regulator to successfully implement joint payment optionality and identify any challenges where they may occur,” he said.
A survey carried out by Substantive Research, a research and data spend analytics provider, on the back of the FCA’s July 2024 rules found that around 50% of asset managers anticipated the market would shift to operating an equal mix of client-funded and P&L-funded research within the next two years.
However, in a survey of asset manager reactions to the FCA’s November 2024 proposals, 60% indicated that the requirements were not workable, and 50% stated that the key issue that needed to be addressed would be a relaxation of the rules around fund-level budgeting.
Mike Carrodus, chief executive officer of Substantive Research, said asset managers who were already keen to take advantage of the new joint payments structure are heaving a sigh of relief now that the rules covering the retail market are aligned with those covering segregated mandates.
He added: “This now removes a huge potential roadblock – and while the conversation with end investor clients about re-introducing research costs is still a big consideration, being able to budget for research at a strategy level will encourage many ‘wait-and-see’ firms to properly explore the move to client-funded research budgets.
“The question now will be whether moving to a CSA*-funded research budget will facilitate greater SME coverage, one of the key motivations for these new rules. Joint payments may indeed encourage greater flexibility for firms looking for new, differentiated inputs, but without greater asset-owner demand for these assets expansion of SME coverage is by no means guaranteed.”
*Commission-sharing agreement
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