The next two years is set to see ‘most’ buy-side firms move back towards CSA-funded research, according to the latest report from Substantive Research, with 87% of respondents predicting that at least half of all research budgets will become client-funded within the next two years.
This includes an ‘overwhelming majority’ of European firms in particular, the report highlighted.
Just over half of respondents (52%) believe that within two years the majority of research budgets will move to client-funded. In addition, another 35% expect half of budgets to have moved within the same timeframe.
Specifically, the Mifid reversal will see the passing investment research costs back on to end investors – reminiscent of pre-Mifid II set ups.
The motivation behind this huge shift in buy-side sentiment of late is down to recent clarifications from the UK’s Financial Conduct Authority (FCA), affirmed Substantive Research, with a November 2024 FCA consultation paper paving the way for the return to CSA-funded research.
In essence, requiring research budgeting at a fund level was found to be a ‘dealbreaker’ for many firms – as a previous report demonstrated.
Prior to Mifid, the status quo saw firms combine research costs and trading activities as one, however with the advent of the directive, fees were unbundled. As Mifid II was introduced at the start of 2018, these fees were separated due to various industry concerns surrounding spending on duplicative or low-quality research.
However, after much to and fro, a 2023 review – Rachel Kent’s UK Investment Research Review – officially concluded that unbundling requirements had had “adverse impacts” on the provision of investment research in the UK and subsequently the UK economy.
It pinpointed unbundling requirements as a potential factor in reducing UK asset managers’ access to global investment research, putting them at a competitive disadvantage on the global scene.
“Asset managers have now had eight weeks to digest the FCA’s final policy statement (CP24/9) that shows that the FCA has listened to the buy-side’s concerns, and allowed for both strategy or firm-level budgeting for research,” explained Substantive.
Previously, the asset management community had been in a ‘wait and see’ mode as regards moving their payment models, but we are now seeing the result of this patience.
Speaking to The TRADE, Mike Carrodus, chief executive of Substantive Research, explains: “It’s important that buy-side firms have become more comfortable with a phased approach. Initially there was a perception that they would need to go “all-in” across entities, markets and strategies, but many are now happy to undertake a more gradual, incremental implementation, learning lessons along the way.”
Elsewhere, an increased number of buy-side respondents highlighted that the separate EU requirements were workable, going from 74% to 94% – with the process similar, but less onerous than in the UK.
The new rules were also believed by 83% of those surveyed to be an opportunity to create regulatory alignment between the US/EU/UK.
“The asset management industry has hit a tipping point. Global firms keen to adopt a single research process across regions now have strong conviction that if they move to CSA-funded research in Europe they will be part of a much wider industry trend,” Carrodus tells The TRADE.
The Substantive Research’s buy-side survey included responses from 40 ‘of the largest asset managers,’ with a combined AUM $13 trillion – 20% North American, 20% EU-based, and 60% from the UK.