London, 11 July 2023: Mike Carrodus, CEO of Substantive Research, the research discovery and research spend analytics provider for the buy side, provides the following views and quotes regarding the Chancellor of the Exchequer’s speech at the Mansion House yesterday.


In his speech, the Chancellor, Jeremy Hunt, confirmed the Treasury’s intention to adopt the recommendations from Rachel Kent’s Investment Research Review

One of the key recommendations allows the buy side to rebundle research and execution. Crucially, the review stipulates that regardless of whether the research is bundled or unbundled, there still needs to be transparency to end investors regarding research budgets, accompanied by efforts by the buy side to benchmark research pricing and communicate payment policies, amongst other transparency guidelines. 

The review outlines that buy side firms that use investment research should:

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

Mike Carrodus, CEO of Substantive Research said, “MiFID II’s Research Payment Account (RPA) structure, which was mandatory if asset managers wanted to continue to pass on research costs to clients in Europe, was too onerous from the perspective of all the largest buy side firms and many of the smaller ones. These latest recommendations seek to keep the transparency ethos from that RPA structure alive, while jettisoning anything that would make asset managers see rebundling as not operationally workable.”

Balancing act

But for these changes to have any effect at all, the FCA’s final detailed rules, which are expected to be in place by the end of H2 2024, will have to successfully walk a tightrope.  The rules must ensure enough transparency in order to sell this transition to end investors, whilst also removing enough of the existing regulatory burden, to tempt asset managers into reworking their now-established MiFID II processes and infrastructure. 

Carrodus added, “Even if the FCA achieves a perfect balance between transparency and workability, the real hurdle is still a commercial one – asset managers need to convince the end investor that it’s in their best interests to bear these costs once again. How pension funds and other asset owners respond to that pitch is the only question that matters. It’s clear that currently asset managers are not keen to open up a discussion about fees in a tough economic and investment climate. These changes from the Treasury may need to wait for a bull market before anyone feels tempted to have a try.”

Flexibility may bring evolution, but change will be gradual

The market will welcome the flexibility to fund and pay for research in whichever way is most appropriate, but asset managers will wait to see how this narrative plays out before they open up any potentially painful conversations about fees with clients. 

Carrodus added, “A bull market in the future could encourage investors to focus on robust performance numbers and focus less on some returning costs. Without that backdrop, convincing asset owners will be a tough sell, especially in the short term. The research industry will welcome regulators getting out of the way in terms of how research is bought and sold, but in the end it will be the commercial discussions that will decide whether the market can rebundle in practice. This review’s retention of transparency, recommending periodic benchmarking, price discovery, disclosure of aggregate research costs etc., recognises that asset managers would need a water-tight case before they even begin this conversation.” 

All Eyes on the FCA and the EU

The timings across the UK and the EU will matter as well. By the end of H2 2024 the new UK rules should be in place alongside the new EU Listing Act, which could be finalised by year end 2023, with each country’s regulators beginning to implement them in 2024. The EU Listing Act will almost certainly include rebundling language, and if both the UK and EU’s sets of rules are complementary then that may indeed spur the buy side to make some changes, perhaps in time for 2025 budgets. 

Carrodus concluded: “There will be questions from pension funds and other investors on why this all makes sense, and what precise assurances and transparency can be expected, to verify that their money is being spent wisely. Thankfully research valuation processes have become much more robust since MiFID II came into force, and could paradoxically be a key component in helping the buy side make their case to investors for eventual rebundling.”