Payment optionality for investment research

11 September 2024 | UK & Europe | Articles

In April this year, the FCA published Consultation Paper (“CP”) 24/7 ‘Payment optionality for investment research’. The paper was in response to industry calls to update the current options and enable firms to pay for research by using combined payments for trade execution and research, referred to as the joint payment option. The CP undertook considerations with a view to providing benefits in terms of market integrity and competitiveness, particularly international competitiveness. The FCA has now issued its final policy position and Handbook rules in Policy Statement PS24/9 on this matter.

What are the payment optionality rules?

The FCA has retained the current allowable means of paying for research:

1. By the firm itself; or
2. Via a Research Payment Account (RPA).

In addition, with effect from 1 August 2024, new rules have introduced a facility to allow firms to make joint payments for third party execution and research services provided they meet a number of requirements in relation to the facility’s operation. These requirements include having:

• A written policy that describes the firm’s approach to joint payments including governance, decision-making and control;
• An arrangement that set out the approach for calculating and separately identifying the cost of research;
• A budget to establish the amount of third-party research required and that the budget is subject to at least annual review;
• A structure for the allocation of research payments between research providers, including payments to Independent Research Providers who will not be party to the provision of execution services;
• An approach to the allocation across clients of the cost of research purchased through joint payments, such that the relative costs incurred by clients are commensurate with the benefits received
• Periodic assessment of the value, quality, use and contribution to the investment decision-making of the research purchased;
• Disclosure to clients of the firm’s approach to joint payments and how joint payments are combined with other payment options as well as the most significant research services purchased, and the cost involved; and
• A firm confirmation that research payments are not a factor in assessing best execution and that FCA rules in COBS 11.2 continue to apply.

In the operation of this joint payment approach, the Policy Statement has made some amendments on the guardrails around its operation noted in the earlier CP:

Budgeting

Rules now allow flexibility to accommodate a level of aggregation that is appropriate to a firm’s investment process, products, services and clients. In addition, where budgets are exceeded, the FCA have clarified that disclosure can be made in the firm’s next periodic report on costs and charges reporting.

Research provider disclosures

The FCA have removed the requirement to disclose the most significant research providers. This is replaced with a required disclosure of the types of research providers used. The level of aggregation in disclosure should be consistent with the firm’s basis of budgeting.

Benchmarking

The CP proposed a requirement to undertake a benchmarking of prices paid for research with relevant comparator providers. This has been amended and requires firms to ensure charges to clients are reasonable. FCA guidance notes that one way to demonstrate reasonableness would be to compare prices paid for research to those of other comparable research providers.

Cost and allocation disclosures

Rules have broadened the basis on which costs can be allocated in line with the option noted under budgeting above. The new rules are now less prescriptive on how to estimate expected annual costs to clients. Firms can now choose between one of two methodologies as appropriate.

The PS has also made some changes to what can be included as minor non-monetary benefits:

• Research on listed or unlisted companies with a market capitalisation of less than £200m offered on a bundled basis has been removed as it has had little take-up. Investment in such assets will be included under the broader joint payment rules going forward; and
• Short term trading commentaries that do not contain substantive analysis and bespoke trade advisory services intrinsically linked to the execution of a transaction in a financial instrument are now included as a minor non-monetary benefit.

How can Bovill Newgate help with payment optionality rules?

For impacted clients, Bovill Newgate can assist with helping to update policies and procedures on investment research and monitoring arrangements in circumstances where firms seek to avail the new research payment options. For our AIFM, UCITS and other CIS clients we will keep you informed as to the impact of developments. Reach out to the team for more information.