FCA To Permit Research Bundling – Fund Management/ REITs

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.

Footnotes

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.

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