Asset managers in the UK will gain greater freedom over how they pay for investment research by allowing the ‘bundling’ of payments for research and trade execution.
The Financial Conduct Authority (FCA) confirmed the rules on Friday (26th) and said they would improve competition in the market for the benefit of investors.
The move reverses a previous ‘unbundling’ measure, where research payments and trade execution payments were split under MiFID II several years ago when the UK was in the EU.
Saying the new bundling would be adaptable to different types of firms, be compatible with rules in other jurisdictions, and making it easier for asset managers to buy research across borders, the FCA also said it wanted to make sure there is “not a return to historic poor practice in this area”.
Mike Carrodus, CEO of Substantive Research, said: “The FCA has made amendments to the proposed rules in their consultation paper, ensuring that many firms will be more positively inclined to return research budget costs to their end investor clients.
“The most important clarification is that buy side firms can budget at a level appropriate to their situation and client base, as many firms interpreted the language in the original CP as insisting on “strategy level budgets” which would have been a dealbreaker for many.”
He said all eyes would now be on the largest asset managers to see if an early-adopter group emerges in the short term.
“But what’s clear is these changes make an end investor funded research market in Europe in the next few years much more likely. Whether that stimulates more research on UK SMEs [small-cap companies] however is another matter entirely!”
The announcement is part of the FCA’s review into wholesale markets, including the listings regime.
Under the proposals, companies will still be required to publish a prospectus when first admitting securities to public markets. However, a prospectus would not be required when a company raises further capital except in limited circumstances.
David Robinson, partner at law firm, Fladgate, said: “The FCA’s proposals will be welcomed, particularly by smaller-cap issuers for whom the costs of producing a prospectus are often disproportionate. The proposal to increase the threshold for triggering a prospectus from 20% to 75% of existing share capital and the use of a public offer platform should allow companies to raise funds more easily, more cost effectively and from a wider investor base. When combined with the imminent changes to the listing regime, the proposals should make UK listings more competitive.”
Sarah Pritchard, executive director of markets and international at the FCA said: “The package we have set out today, alongside our recent reforms to the listing rules, will help to strengthen the UK’s position in wholesale markets. We know we need to strike the right balance between protection for investors and allowing capital markets to thrive.
“With that in mind, we have engaged extensively and broadly in developing the final set of rules to support a thriving investment research market. We are also setting out key reforms to the prospectus regime, and welcome engagement from the sector so that we can get the balance right before deciding the final regime.
“Putting the right information in the hands of investors and removing unnecessary costs will help further bolster the market.”
