Join our CEO Mike Carrodus as he discusses the FCA’s latest CP on Investment Research, exploring its potential impact on asset managers and the future of client-funded research budgets.

  • More than 75% of surveyed asset managers are not likely to change their research process 
  • More than 50% say the updates to MiFID II unbundling rules remove barriers to charging clients for research
  • Around 50% anticipate that the market will shift to operating an equal mix of client-funded and P&L-funded research within the next 2 years

London, 7 May 2024: Substantive Research, the research and market data discovery and spend analytics provider for the buy side, today publishes the results of its latest survey of the asset management community.  The survey gauges the buy side’s appetite to make changes to investment research funding structures, following the latest consultation paper from the FCA: ‘Payment Optionality in Investment Research’, published on 10 April 2024.

The latest FCA Consultation Paper is in response to the July 2023 Investment Research Review led by Rachel Kent, which was published by the UK Treasury. 

The review intended to address some of the unintended consequences of MiFID II’s ‘unbundling’ rules which, since implementation in 2018, have impacted competition amongst research providers, with larger firms being more able to absorb the costs of investment research on behalf of clients, whilst smaller firms and independent research firms struggled to do the same. The UK Treasury’s position is that MiFID II has had a negative impact on investment research coverage of SMEs and put the UK research funding rules at odds with the equivalent regulations in the US, adding challenging complexity for global asset managers consuming investment research from different jurisdictions.

The FCA Consultation Paper outlines potential changes to the research procurement process.  In addition to providing optionality for asset managers to pay for their investment research on their own P&L, or bundled with execution fees, the Consultation Paper also states:

“The requirements on firms in relation to this new option would include them establishing: a formal policy on use of the approach; a budget for the amount of third party research to be purchased; ongoing assessments of research value and price; an approach to the allocation of costs across their clients; a structure for the allocation of payments across research providers; operational procedures for the administration of accounts to purchase research; and disclosures to clients on the firm’s approach to bundled payments, their most significant research providers, and costs incurred.” 

The Substantive Research survey of buy side community found that: 

The survey of 35 of the largest asset managers, representing AUM of more than $11 trillion, found:

76.5% of asset managers do not intend to make changes to their research process. (85% of the survey group currently operate on the P&L research funding model).

This shows that their actual research valuation processes can remain the same – many will have to change disclosure if they want to take advantage of new regulatory changes, but the message here is that the research procurement process is rigorous and comprehensive already.

55.9% believe that the suggested amendments to MiFID II will remove the operational barriers to allow them to once again charge their end clients for the investment research they consume.

Clients are still working out the precise implications of these rules and what needs to change, but it’s clear to many that they feel this won’t be a trivial undertaking.

Asset managers expectations for the funding of research across the industry in 2 years time comprises:

  • Majority of budgets move to client funded – 17.6%;
  • Existing P&L firms make no changes – 35.3%;
  • Broadly equal mix of client-funded and P&L-funded – 47.1%. 

The majority of respondents expect change, but this points to an evolution rather than a rapid, large-scale move in the market.

‘Strategy Level’ disclosures and other requirements could mean a significant administrative burden and have deterred some firms from being early adopters.  

Mike Carrodus, CEO of Substantive Research, said: “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 key question remains: ‘How will end investor clients react to these returning costs, and how will asset managers’ adoption or avoidance of these new freedoms affect their competitive positioning?’”

He added: “What the buy side needs right now is a code – 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.”

Universe of firms covered by the research:

  • 35 of the largest asset managers surveyed
  • AUM : > $11 Trillion 
  • Geographic split: 19% N. America, 12% EU, 69% UK
  • Predominant Research Funding method in UK/Europe : 85%P&L, 12% Mixed P&L / client-funded, 3% client-funded 

Notes to editors

Rachel Kent’s Investment Research Review recommended that buy side firms that use investment research should:

  • Allocate the costs of research fairly between their clients, having regard to the obligation on regulated firms to treat their customers fairly;
  • Have a structure for the allocation of payments between the different research providers – such as Commission Sharing Agreements;
  • Establish and implement a formal policy regarding their approach to investment research and how it is paid for;
  • Periodically undertake benchmarking or price discovery in relation to the research that the firm uses.

The review was intended to urge asset managers to return to charging end investor clients for the external research they use, with the hope that this would drive more flexibility to pay for more research on SME and mid-cap companies which currently struggle for coverage and attention, as well as boost competition amongst research providers.