Regarding CP24/21 relating to investment research payment optionality for fund managers, the punchline is that the FCA is going to take the same line in liberalising the regime for fund managers as it has for investment managers of segregated portfolios. This will apply not just to unregulated AIFs or QIFs but to retail UCITS as well.
The guardrails will be materially the same as those applicable to investment managers, including the need for adequate policies, application of best execution, having a methodology to deal with research costs, provider allocation, setting research budgets, value assessment of the research, cost allocation and disclosure. So all fairly familiar now.
There are a couple of tweaks to reflect the context of fund management of a collective scheme, in particular the disclosures being split between the policies and procedures in the prospectus and the quantitative disclosure in the annual report. The other interesting thing to note is the enthusiasm of the FCA for making this a real option even for UCITS. Hence, the decision to determine that this is a significant rather than a fundamental change with the effect that there is only a requirement for a 60 day notice to investors and no requirements for pre-consent.
So far so good. There are two macro points to note on all of this though. First, the FCA remains behind this liberalisation and thinks that the guardrails will be enough to prevent the type of regulatory concerns which led to mandating unbundling in the first place. Secondly, the various problems which the market has identified with the proposed new world have not been dealt with.
Without going into all of the detail, the essential point is that the devil is in the detail. To flag two of the points I raised on the original proposals for investment managers in an earlier article:
- The rules include the concept of an annual, aggregated level of research fees and this begs a familiar question posed by the original unbundling rules: how do you value research? Historically, research has been perceived as somewhat of a 'free good', yet this will no longer be the case.
- Secondly, there is the requirement regarding the allocation of payments between research providers. There is little clarity on how this should be done.
More generally, the guardrails arguably involve quite a lot of work and it is unclear how ready or willing firms are to undertake what is involved. Over the last few months, many market players have taken the line that they have made the research payment account structure work and so it remains to be seen if the new option will turn into a market standard or a market exception.
In summary, the extension to fund managers from the original investment manager proposals does not move the dial on where the market will go - this remains to be seen.
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