FCA publishes final rules on bundling payments for investment research and execution

On 26 July 2024, the Financial Conduct Authority (FCA) published its policy statement on payment optionality for investment research (PS24/9) (the Policy Statement). This reintroduces the option to pay for third-party investment research and execution services jointly through bundled payments, provided that certain requirements are met. 

The Policy Statement was adopted following FCA’s consultation paper on the same topic (CP24/7) (the Consultation Paper). As summarised in our blog post on the Consultation Paper (which can be found here), the changes form part of wider reforms to strengthen the UK’s position in global wholesale markets. The July 2023 Investment Research Review (IRR), commissioned by the government, set out a series of recommendations to improve the investment research market. The Consultation Paper and the Policy Statement are FCA’s response to Recommendation 2 in the IRR, which recommended an option to pay for investment research where the payments for research and trade execution are combined.   

These proposals have now been adopted, with some amendments in the Policy Statement. The rules in the Policy Statement took legal effect on 1 August 2024.

Firm's requirements for joint payments for third-party research and execution services

The new option introduced by the FCA allows firms to charge jointly for third-party research and execution services, subject to complying with certain requirements which we have summarised below:

1. Written policy: firms will need a written policy describing the firm’s approach to joint payments and specifying the firm’s governance, decision-making and controls for third-party research, and how these are maintained separately from those for trade execution.  
2. Arrangements with the methodology for calculating research costs: firms will have to establish arrangements stipulating the methodology for calculating and separately identifying research costs.  
3. Research providers payment allocation structures: firms will need to put in place a structure for allocating payments between research providers, including third-party research providers and research providers who are not engaged in execution services. 
4. Budget for the purchase of research: firms will have to set a budget for third-party research linked to expected costs of research (and not to the volume of transactions with clients), reviewed at least annually (although it does not preclude more frequent consideration of budgets, whether regularly or when circumstances necessitate a mid-period adjustment).  
5. Allocation of the costs of research across clients: firms will have to allocate the cost of research using joint payments fairly across clients, with an approach appropriate to the investment process, products, services and clients of the firm, and ensuring that relative costs incurred by clients are commensurate with relative benefits received.
6. Periodic assessment of the value and charges for research: firms will have to periodically, and at least annually, assess the value, quality and use of the research, its contribution to the investment decision-making process, and the reasonableness of research charges against comparable services. 
7. Disclosure to clients: firms will have to disclose to clients the firm’s approach to joint payments, including the use of joint payments for research, the key features of the firm’s policy (or the policy itself) in a way that is clear, fair and not misleading, the expected annual costs of research for the client, the benefits received from research, the types of research providers used, and the total costs actually incurred by the client. 
8. Operational procedures: firms will have to put in place operational procedures for the administration of accounts used to purchase research, and for the delegation of such responsibilities to others, to ensure compliance with the firm’s obligations. 

The Policy Statement also (i) adds short-term trading commentary and advice linked to trade execution to the list of acceptable minor non-monetary benefits in the Conduct of Business Sourcebook; and (ii) removes the option for bundled payments to purchase research on companies with market capitalisations below £200 million from the list of minor non-monetary benefits.

Comparison with the Consultation Paper

The Policy Statement broadly follows the proposals in the Consultation Paper, but with some amendments to reflect feedback received from industry. These changes provide increased latitude and discretion for firms to choose how to comply with the new requirements for bundled payments. 

Separately identifiable research charges: the Consultation Paper previously required written agreements with research providers to establish a methodology for how research costs are identified separately within joint payments for research and execution.  Firms will now only be required to establish ‘arrangements’ that stipulate the methodology for separate identification of research costs. FCA’s changes to the Consultation Paper are intended to accommodate a broader range of potential market practices and arrangements (both bilateral between firms and multilateral with service providers; both physically and electronically documented; or both as negotiated agreements and via standard terms of business).

Budgeting: compared to the Consultation Paper, the FCA clarifies in the rules that there is flexibility to accommodate a level of aggregation that is appropriate to a firm’s investment process, products, services, and clients. The FCA also specifies that disclosures on budgets being exceeded should be made as soon as reasonably practicable, and can be part of a firm’s next periodic report on costs and charge.

Research provider disclosures: in the Policy Statement, only the types of research providers need to be disclosed, as opposed to the specific most significant research providers. Further, as with budgeting, the Policy Statement incorporates greater flexibility on the aggregation of disclosures, based on the firm’s investment processes, products, services and clients. 

Price benchmarking: the Consultation Paper proposed that firms explicitly benchmark prices for investment research against comparators, but this has been amended to require firms to ensure that research charges are reasonable, where benchmarking, as guidance, is one method of demonstrating reasonableness. 

Cost allocation and disclosure: the Policy Statement provides firms with discretion on allocating costs, so long as costs are appropriate to the firm’s investment process, products, services and clients. The same is true for costs disclosure, where the Policy Statement has given flexibility on how to estimate expected annual costs to clients.