ResearchPool model backed by UK regulator’s unbundling consultation
Yesterday morning, the Financial Conduct Authority published Markets in Financial Instruments Directive II Implementation – Consultation Paper III.
Changes are clearly announced
For Research Providers
They need to review their business model to develop charging models and service agreements with investment firms for the supply of research, and to adjust their execution costs and charges accordingly.
For Asset Managers.
The only means by which they can receive third party research in relation to their services to clients is to set-up a budget up-front and to operate via a RPA account.
They may expect a reduction of dealing commission charges through better control and scrutiny operated by asset managers. This is due to the emerging of an open and transparent market.
They will benefit from better quality and coverage of research compared with the current market. A more open, competitive research market will encourage new entrants and innovation in pricing and distribution models.
The 568-page document covers Inducement & Independent Investment advice, Product Governance, Inducement and Research, Best execution and includes EU legislation and a FCA Handbook with concrete proposals of rule amendments. Despite the magnitude of this comprehensive document, it remains very business oriented and concrete.
The key principles and outcomes:
- investment firms account for third party research as a fixed, predictable cost, not linked to execution costs or charges or subsidised through other services
- research becomes a core management cost and fully transparent to investors,
- a transparent, priced research market emerges where recipients and providers establish upfront pricing based on the quality and quantity of goods and services
What are the FCA’s main proposals regarding Inducements & Research?
Extending the research and inducements requirements to firms carrying out collective portfolio management activity
Two main reasons behind this rationale:
- Fair treatment of investors: Investing in funds or in a collective investment instrument with similar investment strategy, investors should receive same protection standards and same level of transparency regarding costs and charges.
- Cost efficiency & productivity: As many asset management firms operate both IPM and CPM activity, the most cost efficient and productive way to meet the MIFIDII requirements would be to implement common rules for inducements and research funds for IPM and CPM.
A new RPA regime
A single RPA to manage each separate research budget set by the firm would be the most effective solution.
Operationally, some changes to current Commission Sharing Agreement (CSA) accounts are required:
- research charges deducted through a broker alongside transaction fees or costs are ceded (or ‘swept’) to an RPA immediately following the associated transaction
- except when the research charge temporarily passes through an executing broker, an investment firm’s RPA monies are to be ring-fenced and separately identifiable from the assets of any third party entity they use to hold and administer the RPA (which can include a broker), prior to the investment firm instructing payment to a research provider
- payments from the RPA must be made in the name of the investment firm based on their instructions, and must be fully audited
- RPA arrangements allow the investment firm to rebate RPA funds to those same clients if significant amounts are unspent at the end of a budget period
Research’s scope includes Equity and non-Equity instruments
Investment managers will have to ensure they can make payments to receive research when managing and transacting in non‑equity or equity related derivative instruments.
Some third party service providers are exploring mechanisms to allow firms to deduct a research charge from clients alongside a transaction in non‑equity instruments.
Corporate Access is considered as goods or service that the FCA does not regard as research, and as a result cannot be paid for from research payment accounts.
This approach is not aligned with the proposal from the French Regulator, AMF, which judged there to be 2 categories of Corporate Access:
- Straightforward introduction without provision of a service of an intellectual nature. In that case it can’t be considered research.
- Introduction accompanied by the provision of a service of an intellectual nature. In that case it can be considered research.
Nevertheless, it seems difficult to define objective and measurable criteria to distinguish the 2 categories.
A new research market is under construction
FCA anticipates that the operational changes that investment managers, in particular, may need to make to meet the new MiFID II approach may be complemented by new services being offered by third parties.
RPAs administrator, which may involve holding RPA funds on behalf of a portfolio manager, performing basic due diligence on research providers to confirm they are legitimate, and processing payments.
New intermediary platforms facilitating buy-side access to priced research products or subscriptions from a range of service providers, which help both buy-side firms to access research on a priced basis and allows independent providers a distribution channel through which to advertise and sell their products and services
The need to keep pace with MIFIDII principles despite the risk of temporary competition distortion
Regarding the BREXIT issue FCA is comfortable that the new rules will benefit UK Asset managers particularly with respect to firms carrying out CPM
“However, we think the net benefit outweighs this risk, and that over time the impact of the reforms should make UK funds more transparent and better value for money. There is also the possibility that subsequent revisions to the UCITS Directive and AIFMD may harmonise standards, meaning any differences may be temporary and at that stage UK fund managers would already meet the requirements and not need to make changes”
By transforming the way that Investment Research is intermediated, Researchpool is contributing to the creation of the new open and transparent Research market with better quality standards for all actors. In addition, its new suite of digital tools for professionals will help asset managers to manage and monitor investment research resources in terms of forecasts, expenses and usages to meet MIFIDII requirements.