On Friday 26 July, the UK's Financial Conduct Authority (FCA) published a policy statement on payment optionality for investment research.

The FCA is proceeding with the establishment of a new payment option with requirements for separately identifiable pricing for research and a research provider payment allocation structure. The FCA has made several adjustments to the option’s associated guardrails to mitigate any undue costs or harms and facilitate compatibility with international practices. Amendments have been made to the guardrails on budgeting, research provider disclosures, price benchmarking and cost allocation and disclosures. A minor modification has been made to the guardrail on separately identifiable research charges. The FCA is also proceeding with its proposals to (i) add short-term trading commentary and advice linked to trade execution to the list of acceptable minor non-monetary benefits for all payment options in COBS 2.3A; and (ii) delete the option for bundled payments to purchase research on companies with a market capitalisation below £200 million from the list of acceptable minor non-monetary benefits in COBS 2.3A. A summary of the policy statement is provided below.

The FCA stated that feedback on areas not relating to the changes proposed in CP24/7, such as inducement rules covering corporate access and the treatment of fixed income, currency and commodities research, has not been addressed in the policy statement.

The changes will come into force on Thursday 1 August 2024. The FCA states that firms must determine what contractual obligations they are under before starting to use the new payment option, including the information they would need to communicate to clients and whether they would have to obtain client consent.

The FCA will consult in Autumn 2024 on necessary rule changes to COBS 18 Annex 1 to align the rules for investment firms and fund managers.

A summary of the policy statement is provided below.

If you have any questions regarding the consultation, please contact Aniqah Rao.

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1. New Payment Option

• The FCA is proceeding with the introduction of an additional payment option for investment research.
• It is the FCA’s intention to introduce an option that necessitates “CSA-like” arrangements and that does not facilitate “full bundling”.
• The FCA states that full bundling would lead to opacity of prices paid for research services, challenge the ability to compare prices paid across research providers and not preserve competition in the separate markets for research and trade execution.
• The FCA states that although CSA-like arrangements may not be a regulatory requirement in other jurisdictions, they are a common operating practice and a frequent firm choice in research procurement.
• The FCA states that the requirement for CSA-like arrangements instead of full bundling should address concerns raised on brokers insisting on joint payments.
• The FCA has not explicitly included in requirements the Investment Research Review recommendation that sell-side firms should not be required to facilitate payments on a bundled basis or be able to require that buy-side firms use bundled charges, as this would risk neutralising the choice of those that wish to adopt a new payment option.

2. Measuring Success

• The FCA believes that there is sufficient demand for use of the new option over the short and medium term and that, in the longer-term, further incremental take-up is likely.
• The FCA believes the following measures should be used to determine success: take-up of the new option; positive changes in trends of research production/ consumption and in the structure of that market; and indicators that the first two measures have not been achieved via undue costs or harms to consumers. The FCA believes this could be achieved by undertaking a survey, after a reasonable period.
• The FCA states that it may be challenging to compare take-up with other jurisdictions as the FCA itself cannot collect data from market participants in such jurisdictions and all jurisdictions would need to have a common approach to measuring take-up at the same time.
• The FCA has not included assets under management in the UK and UK equity market conditions as success measures.
• The FCA will keep international developments under review in future years as a “key intent” of the FCA’s changes is to ensure the interoperability of the new option with payment models in other jurisdictions.

3. Guardrails

Budgeting:

• In CP24/7, the FCA had provided examples of how budgeting in COBS 2.3B.25(R)(5)(B) could be undertaken at the level of an investment strategy or a group of clients and the FCA had specified that disclosures on budgets being exceeded should be made within the research budget period.
• The FCA now provides flexibility to accommodate a level of aggregation that is appropriate to a firm’s investment process, products, services and clients (while not compromising a firm’s ability to meet the separate guardrails on fair allocation of costs and client disclosures).
• The FCA clarifies, in COBS 2.3B.31(R)(3), that disclosures on budgets being exceeded should be made as soon as reasonably practicable and can be part of a firm’s next periodic report on costs and charges, rather than as a separate communication to clients.
• The FCA clarifies that the requirement that budgets be set at least annually does not preclude more frequent consideration of budgets, whether regularly or when circumstances necessitate a mid-period adjustment.
• The FCA clarifies that where client disclosures are set out in other requirements, it does not specify there that overall budget amounts need to be disclosed.

Research provider disclosures:

• In CP24/7, the FCA had proposed that firms disclose their most significant research providers in COBS 2.3B.30(R)(4).
• The FCA replaces this with a requirement to disclose the types of providers from which research services are purchased. The FCA has provided guidance in COBS 2.3B.32(G) clarifying that this could be achieved through a breakdown according to independent research providers vs non-independent research providers.
• The FCA amends the level of aggregation at which such disclosures in COBS 2.3B.30(R)(4) are to be made, to mirror those of the amended budgeting guardrail (i.e. at a level of aggregation that is appropriate to a firm’s investment process, products, services and clients).
• The FCA clarifies that the requirements of COBS 2.3B.30(R)(4) and 2.3B.32(G) do not necessitate disclosure of the actual amounts paid to research providers – they are used to determine significance.

Price benchmarking:

• In CP24/7, the FCA had proposed a requirement to undertake benchmarking of prices paid for research services against relevant comparators to ensure charges to clients are reasonable.
• The FCA amends this to require that firms ensure that research charges to clients are reasonable. The FCA has provided guidance clarifying that benchmarking of prices paid for research services is one means of demonstrating compliance.

Cost allocation and disclosure:

• The FCA does not agree that cost disclosures do not need to be provided, that cost disclosures only need to be provided at the firm level and that the guardrail on cost disclosures can be combined with others.
• Fair allocation of costs (COBS 2.3B.27): The FCA has retained aspects proposed in CP24/7 such as requiring firms to consider clients with different payment arrangements, clients that are managed according to similar investment strategies and clients or groups of clients that benefit from the same research. However, the FCA provides latitude about the levels at which costs are allocated, provided these are appropriate to a firm’s investment process, products, services and clients.
• Providing expected annual costs to clients, as part of ex ante disclosures on costs and charges (COBS 2.3B30(R)(3)): In CP24/7, the FCA had proposed for expected costs to be based on both budget-setting and cost allocation procedures and the actual costs for prior annual periods. The FCA now provides flexibility so that asset managers can calculate expected costs according to which of the two methods is most appropriate.
• The FCA clarifies that the new rules will apply only to providers of investment services rather than packaged investment products and specifies that cost disclosure requirements are to be met as part of firms’ existing costs and charges disclosures (COBS 2.3B31(R)(2)). The FCA notes that its plans to replace the PRIIPs regime with a new disclosure regime.

Separately identifiable research charges:

• The FCA does not agree that it is not possible to have a separate price for research – the FCA understands that a value and a cost are assigned to research by providers and consumers both when paid for separately and when purchased under CSA-like arrangements.
• In CP24/7, the FCA had proposed a requirement that there be written agreements with research and execution providers to establish a methodology for how research costs are identified separately within total charges for joint payments (COBS 2.3(B)25(2)).
• The FCA changes this to a broad requirement to establish arrangements that stipulate the methodology for how such research costs are separately identified. The FCA states that this accommodates bilateral arrangements between firms and multilateral with service providers, physically and electronically documented and as negotiated agreements or via standard terms of business.

4. Other Related Changes

Short-term trading commentary:

• The FCA has proceeded with its proposal to add to the list of acceptable minor non-monetary benefits for all payment options in COBS 2.3A.19R(5) short-term trading commentary and advice linked to trade execution.
• The FCA does not believe that this change is likely to have a sufficiently material impact on competition in the market for investment research to outweigh the market integrity benefits of increased information availability to asset managers.

SME research:

• The FCA has proceeded with its proposal to delete the option for bundled payments to purchase research on companies with a market capitalisation below £200 million from the list of acceptable minor non-monetary benefits, under COBS 2.3A.19R(5)(g).
• The FCA states that the three payment options that are now available form a sufficient basis on which to pay for research for such issuers.