Over three quarters of asset managers expect not to make changes to their investment research processes despite the prospect of more freedoms due to recent regulatory updates, according to Substantive Research’s latest asset management community survey.
In the wake of the FCA’s research payment optionality, the report delved into how the current landscape is shaping strategies moving forward and asserted that either adoption or avoidance of new freedoms in the space is set to affect firms’ competitive positioning.
Speaking to The TRADE, Mike Carrodus, chief executive of Substantive Research, said: “This Consultation Paper from the FCA doesn’t have any total deal breakers, but there is comprehensive disclosure here that may slow down some of the firms who were keen to move early.
“[…] The experiences of the early adopter group at the end of this year will be key, and also if any of the largest firms are in there – all eyes will be on them to gauge how much complaining and pushback there’s been from end investor clients.”
Read more: FCA eyes first half of 2024 for revisions to UK research rules after Mansion House announcement
Carrodus explained: “The buy-side reaction to the FCA’s consultation paper is a three-way split, between those that want to transition to a client-funded research budget rapidly, those that will never do it unless they are literally the last P&L research payers left, and finally a large cohort that would be interested in reducing their own costs in a challenging market, but would like to watch this play out for a while.”
The majority of buy-side respondents confirming no change to their processes demonstrates that firms are keenly aware that the research procurement process is already rigorous and comprehensive at present and taking advantage of new regulatory changes will add to this burden, asserted the research body.
The findings demonstrated that 55.9% of asset managers believe that recent updates to Mifid II unbundling rules remove operational barriers to charging clients for research. As a result, end-clients can once again be charged for the investment research they consume.
Looking ahead, asset managers are of conflicting perspectives as to what the next couple of years hold in store for research funding across the market.
While 17.6 % of respondents see the majority of budgets moving to client funded over the next two years, 35.3% believe that existing P&L firms make no changes, and 47.1% expect an approach of broadly equal mix of client-funded and P&L-funded.
The report noted that currently, 85% of those surveyed operate on the P&L research funding model.
“[The FCA’s consultation paper] supports a scenario where the early adopter group this year is small, with a much bigger herd engaging in the spring/summer of 2025 with a view to moving their 2026 budgets to a client-funded approach,” Carrodus told The TRADE.
While the majority of respondents expect change, it more of an evolution than a rapid, large-scale move in the market, according to Substantive Research.
Speaking to what should be front of mind for asset managers, Carrodus suggested that what the buy-side required right now is a ‘code’.
Specifically, “a set of standards that firms feel that they can sign up to. There will be different interpretations of the current wording of the FCA paper, and uncertainty on issues like what constitutes a ‘Strategy Level Budget’ and associated levels of disclosure. The buy-side will want detailed frameworks to compare against, which the FCA can verify, ultimately providing more comfort to asset owners.”
Read more: FCA tables re-bundling to support more ‘flexible’ approach to research
Substantive Research’s survey includes insight from 35 of the largest asset managers globally, including a majority 69% UK firms, 19% hailing from North America, and 12% from the EU.