After the Financial Conduct Authority (FCA) released a consultation paper on proposed changes to the existing rules governing how payments for investment research are made, there was a mixed response from the industry.
Now, Substantive Research, a research and market data discovery and spend analytics provider, has published the findings of its latest global asset management survey today, evaluating the industry’s reaction to the new FCA rules on paying for investment research, which came into force on 1 August 2024.
The survey aimed to gauge asset managers’ reaction to the final rules and to see whether the FCA’s changes to their initial proposals will change the industry response.
Substantive Research revealed that the survey confirms that the changes the FCA has made between the Consultation Paper and the final rules have eliminated some deal breakers for the more engaged firms keen to proceed.
The FCA removed key operational barriers that were hampering the potential take-up of greater flexibility in research funding, and there is a group of asset managers gearing up to test market reaction, save money and potentially increase their access to research inputs. But an equal number of buy-side sceptics point to a scenario where asset owners scupper any real momentum shifts.
It found that more managers are now ‘neutral and waiting to see how the market moves’ (45 per cent), up from 42 per cent. Meanwhile, the proportion of those ‘interested but put off by the detail of the FCA guardrails’ (on budgeting, disclosure, cost allocation and valuation) fell by nine per cent down to 9.1 per cent.
However, more than a quarter of firms (18.2 per cent) do not intend to move budgets and are sceptical that this will gain traction with peers.
A shift in reaction
Substantive Research says that many of these firms don’t think the changes would encourage further coverage of UK SMEs, and regard the unbundling rollback as an unwelcome distraction, now that they finally have their post-MiFID II processes in place and working well.
“The changes in asset managers’ attitudes are driven by changes in the FCA’s final rules when compared to the initial consultation,” explained Mike Carrodus, CEO of Substantive Research. “It’s clear that the biggest sticking point was the impression that the Consultation Paper was mandating strategy-level research budgets. This is something that many firms are loath to do, as they share research across the firm and would find allocating that spend at a granular level problematic.”
Overall, 60 per cent of respondents cited ‘relaxation of the rules around strategy level budgets’ as the most important change, followed by ‘removing the requirement for buy-side firms to have separate written agreements with providers’ (18.2 per cent).
“We are now faced with two sets of firms with completely opposing views, both representing approximately a fifth of the market, and nearly half of the buy side on a ‘wait and see’ mode,” added Carrodus.
Only time will tell
The research also indicated a split in the market regarding expectations on how fast the new FCA rules on investment research will be adopted. The proportion of firms that do not expect any change within two years has grown by seven per cent, up to 42.4 per cent.
However, 15.2 per cent believe the majority of research budgets will be client-funded within the next two years, while the remaining 42.4 per cent expect an equal mix of client-funded and P&L budgets in that time.
Carrodus concluded: “The FCA has clarified that it only needs asset owners to be informed of the new policies and changes if asset managers do move to ‘joint payments’, so explicit consent is not required. However, many senior executives on the buy side do not want to open up the discussion on fees during such a challenging time for asset gathering and retention.
“As these are new costs being reintroduced after six years of asset managers paying for them out of their own pockets, they anticipate pushback from clients and do not want to have to try and figure out what to do if a handful of clients object and opt out of paying while the rest acquiesce.
“Brokers and independent research providers may target a more lucrative future after years of price deflation, but we’ll only know if those hopes are well founded when the first canaries venture down the coalmine this winter.”
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