FCA issue final rules on investment research payment optionality
On 26th July 2024, FCA published a policy statement (PS24/9) introducing the final rules on payment optionality for investment research. PS24/9 follows the publication of the consultation paper (CP24/7) in April where changes where first proposed.
As a reminder, under the MiFID II inducement rules, research must be paid for either out of a firm’s own resources or recharged to a client through the use of a Research Payment Account (RPA). The new rules in PS24/9 introduce a third option for paying for research using a bundled (“joint”) payment for trade execution and research. At the time, the proposals attracted attention given the unbundling requirements were one of the more controversial aspects of MiFID II rules, as well as the perception that these changes were originally driven from the UK side rather than the EU side. However, the FCA make clear in the policy statement that these changes do not represent a complete reversal of its position; the new payment option is not a return to “full bundling” and comes with a significant compliance and administrative overhead (summarised below). Firms will therefore need to assess whether the benefits of opting to use the new option are outweighed by the resource involved to comply with the new requirements associated with it.
The requirements (or “guardrails” as referred to by FCA) that apply when using this new payment option include:
Written Policy: Firms must have a formal policy on the use of this approach, including with respect to governance, decision-making, controls, and how these are maintained separately from those that are for trade execution.
Budgeting: Firms must set a budget (at least annually) for purchasing research that is based on the expected amount needed in respect of the services rendered to clients and not linked to the expected volumes or values of transactions executed. Unlike the initial proposals, the final rules allow flexibility to accommodate a level of aggregation relevant to a firm’s investment process, products/services and clients (rather than budgeting at the level of investment strategy or group of clients).
Separately identifiable research prices: Rather than requiring a written agreement with research providers, FCA instead require “arrangements” to be in place which stipulate the methodology for how the research costs will be calculated and identified separately within total charges for joint (bundled) payments. 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.
Period assessments: At least annually, firms must assess the value, quality and use of research purchased and its contribution to the investment decision-making process. Firms must also ensure the research charges are reasonable with those for comparable services (e.g. through price benchmarking).
Research cost allocation: Firms must allocate the costs of research purchased using joint payments fairly between clients. The final rules include additional flexibility as to the level of aggregation at which a firm may determine its approach to cost allocation, mirroring the amended budgeting guardrail.
Payment allocation structure: Firms must establish a research provider payment allocation structure for the allocation of payments between different research providers (i.e. full-service brokers and independent research providers).
Procedures: Firms must establish procedures for the administration of accounts used to purchase research with joint payments.
Disclosures: Disclosures must be provided to clients on the firm’s approach to bundled payments, the types of research providers (e.g. whether independent research providers or not), and costs incurred.
The changes to the research rules came into force on 1st August 2024. Given the rules only apply where a firm chooses to exercise this new payment option, no immediate action is required. However, we recommend firms update their Research Policy to reflect the new rules. If you’d like assistance with this, or have any questions on the new payment option, please contact us.