In May, the UK’s Financial Conduct Authority’s (FCA) implemented new rules allowing fund managers to pay for research with a joint payment option, essentially allowing for the ‘bundling’ together of payments for trade execution and research.
This followed the FCA’s July 2024 decision to re-introduce an optional element of rebundling for Mifid investment firms, with the UK buy-side able to facilitate joint payments for third-party research and execution services.
The topic is one which is keeping firms on their toes and reinvigorating the debate around the previously delicate balance of research-related decisions weighing on trading desk movements – something desks of course want to avoid.
“If you speak to a dealing desk, they don’t want to go back to a rebundled market because that has the connotations of directed trades and all the inefficiencies that entails. But that needn’t be the case – use of CSAs should ensure you can still deal where you think you’re going to get the best execution. That’s absolutely critical,” explains Andrew Quick, global head of execution services at Redburn Atlantic, who highlights that this should be seen as an opportunity for those teams to return to the investment team process.
“This is an opportunity to get dealers back into the investment team’s process. Some desks have come to be viewed by their PMs as operational rather than integral to the investment process which feels a shame. Joint payments is about working together to help those who are helping performance.”
The back and forth was a direct result of the pursuit for increased efficiency when it came to firms acquiring research, but now that we have seemingly come to a conclusion, let’s take a look back at the journey and how the industry is feeling about what’s now on the table.
Mifid – a bundle of fun
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.
At the time, a significant concern for asset managers was the possibility that access to, and quality of, research would be diminished. Most firms looked to get this research from their internal sources, or research payment accounts (RPA).
The motivation behind the change was to up the quality of research, as well as eliminate the influence of research on trading desk decisions.
As Quick explained in his recent opinion piece for The TRADE: “The word ‘rebundling’ tends to trigger dealers, who immediately recall the bad old days of directed trades and fund managers leaning over their shoulders guiding them on which counterparty to use for the trade – regardless of whether it ensured the best outcome or not.”
However, all in all, the good intentions behind regulators’ decisions at the time cannot be denied – the pursuit of more efficient capital markets is necessary after all. But, demonstrably, there was work to be done when it came to the introduced set-up.
As Quick explains: “The intention of unbundling was good, it was ideally to have an explicit payment for the consumption of research and allow dealers to focus on securing best execution – the problem came from the unintended deflation of research payments.”
Not to mention another factor key which came into play – the diversion between the UK’s payment structure and other regions, namely the US.
Subsequently, in 2023, Rachel Kent’s UK Investment Research Review – a report commissioned by the UK government – highlighted the importance of investment research as a crucial element of effective and attractive capital markets, emphasising that more and better research could directly result in better pricing for all companies and, importantly, increased liquidity for the market.
The review officially concluded that unbundling requirements had had “adverse impacts” on the provision of investment research in the UK and subsequently the UK economy, and also 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.
Speaking to The TRADE at the time, Mike Carrodus, chief executive of Substantive Research, explained: “Rachel Kent’s review focuses on removing enough of the operational burdens to encourage asset managers to take advantage of new rebundling freedoms, but not so much that transparency for asset owners is completely jettisoned.
“The FCA now has the task of preserving this sensitive balance […] asset owners will have to buy into the message that taking on these costs will benefit the investment processes of their asset managers, and by extension the money that they are investing with them.”
The review consisted of seven recommendations as to the empirical approach, as well as advising the inclusion of an additional optionality for paying for investment research – ensuring greater access to investment research for retail investors.
Speaking at the time, Jeremy Hunt, then Chancellor of the Exchequer, said: “The government welcomes Rachel Kent’s excellent Investment Research Review (IRR) published today and has accepted all recommendations made to it.
“We therefore welcome the FCA’s commitment to start immediate engagement with the market to inform any rule changes on removing the requirement to unbundle research costs by the first half of next year.”
And so, it began.
We’re all in this together
After the IRR was laid out, plans were put in motion for change, with a consultation release by the FCA on the notion of payment optionality in April 2024 – specifically joint payments for Mifid firms. This became a reality just three months later with the re-introduction of an optional element of rebundling.
Under the new proposed payment option, the UK buy-side were able to facilitate joint payments for third-party research and execution services, provided these firms met set requirements.
“They [the FCA] have made changes in a few areas which definitely increase the likelihood of the buy-side being tempted to try to get these costs off their own P&Ls and potentially become more open to consuming new research,” Carrodus told The TRADE at the time.
“For example, many interpreted the proposed rules in the consultation paper as requiring ‘strategy level budgets’ which would have been a dealbreaker for some asset managers – this has been clarified and removed. Allocating a budget down to individual teams is common practice, but for some asset managers who consume and repackage research insights centrally this would not have been an option.”
Notably, the FCA’s new rules also meant that firms were not obligated to disclose their top providers in terms of payment amount – a direct result of feedback from participants in the consultation – and instead provide a breakdown of types of providers in the budget.
The new rules also included a more relaxed approach in how firms ensure research charges versus execution costs, with firms required to put in place set-ups that evidence how the separation is done more broadly.
Following this, the FCA followed up with a new rule focused on fund managers, with a pay for research model introduced, including a joint payment option.
The decision also came off the back of recommendations from the IRR and pertained to the full-scope UK alternative investment fund managers (AIFMs).
The rules allowing fund managers to pay for investment research using a joint payment option for research and execution services were based on those introduced for Mifid investment firms.
Speaking to the TRADE at the time, Carrodus explained: “Now that buy-side firms can budget for research at a strategy level, the group that are motivated to transition over to CSA-funded research will expand materially.
“The next question will be how quickly they can move across, with a small group getting it done by the end of the year and a much larger contingent now targeting 2026.”
Notably, the FCA in both instances opted not to re-implement ‘full rebundling’, with the watchdog explaining that this would lead to opacity of prices paid for research services, as well as hinder the comparison of what prices have been paid to research providers, and subsequently hinder competition on both the trade execution and research side.
Demonstrably, the new rules appear to be here to stay and with this in mind, firms are now in the midst of analysing their set ups to make the most of this presented opportunity.
Speaking to The TRADE, Giulia Pecce, head of secondary capital markets and wholesale investor protection policy at AFME, said: “The recent rules for pooled vehicles is good news as firms will be able to make a holistic assessment of the new payment option across the franchise.
“In particular, the increased flexibility on budgeting rules is a welcome improvement compared to consulted-on rules. The new framework needs to be assessed in its entirety and no doubt firms will be dissecting it to understand the operational impact of each element.”
Getting the toothpaste back in the tube
Though this update has been widely understood as an opportunity to advance things in the research space, the reality is that in many instances it is looking as though a key challenge will be convincing some firms to go back on their current set ups.
When it comes to the asset management side, a recent report from Substantive Research found that the buy-side are falling into one of three categories – a core of potential early adopters, a large ‘wait and see’ group and an entrenched group of sceptics.
In light of the final rules, the potential early-adopter group doubled, while the group of managers who were neutral and ‘waiting to see’ grew also – though to a lesser degree.
Notably, just 9.6% fell into the ‘not interested in moving’ pack, regarding the unbundling rollback as “an unwelcome distraction, now that they finally have their post-Mifid II processes in place and working well,” according to Substantive.
Speaking to The TRADE in June, Carrodus explained: “The initial group of smaller firms moving fast towards CSAs in the UK are apparently encountering very little push back from end investor clients. Whether that’s a signal for the larger firms to have greater comfort levels concerning their ability to follow suit is by no means certain.
“However, it does suggest that this will gradually become a European industry trend, especially once the EU regulations are implemented at a domestic level in June 2026.”
Speaking to the need to embrace the change, Quick affirms: “Joint payments should actually be a net positive for dealing desks if they embrace it but they’re definitely going to have to change the way they approach things.”
Importantly, changes made by the FCA in the final rules reportedly eliminated some deal breakers for the more engaged firms keen to proceed – removing key operational barriers which were hampering the potential take-up of greater flexibility in research funding.
The same survey found ‘relaxation of the rules around strategy level budgets’ was the most important change, followed by ‘removing the requirement for buy-side firms to have separate written agreements with providers’.
Notably, a number of senior executives on the buy-side were reportedly not so keen to open up the fees discussion due to the current market situation representing such a challenging landscape for asset gathering and retention. The change being reintroduced six years later is of course no small mission.
Robert Buller, global account management at Kepler Cheuvreux, tells The TRADE that “Kepler Cheuvreux is well positioned to benefit from joint payments,” but adds that “most UK long-only managers are hesitant to be first movers. Serious implementation is more likely by 2027, given the operational and regulatory steps required.”
Likewise, the fund management side appears to be taking a similar view, as Joe Abdallah, global head of account management at Kepler, explains: “UK hedge funds prefer the stability of their current RPA setup, and on the Continent, client interest in joint payments remains limited, even with regulation expected by mid-2026.”
After ten years, the unbundling to rebundling journey has seemingly reached its conclusion, and while the introduction of new initiatives from the UK government are widely regarded as the right step towards bolstering capital markets in the region, there is definitely work to do.
The industry is now facing the challenge of reassessing their processes and finding the right path to efficiency when it comes to their broker relationships – there’s a prime opportunity here, but it remains to be seen just which firms are ready and willing to embrace it… stay tuned.