Back to the Future – Part III – Joint Payments (fka Bundled Commissions)

As referenced in our alert from May, the FCA has now released Policy Statement PS24/9 Payment Optionality for Investment Research. The Policy Statement and release of the final rules confirms that asset management firms may buy investment research using joint payments for third-party research and execution services, provided that they meet the new FCA requirements.

In order to use joint (i.e., bundled) payments, firms must:

1. Implement a written policy describing the approach to joint payments;
2. Organise an arrangement that stipulates the methodology for calculating and separately identifying the cost of research;
3. Ensure that there is a structure in place for the allocation of payments between research providers (including independent research providers), as well as ensuring the fair allocation of costs of research across clients, commensurate with the benefits received by each client;
4. Periodically assess the value, quality, use and contribution to investment decision-making of the research purchased, and how they ensure that research costs charged to clients are reasonable against relevant comparators (to be undertaken at least annually);
5. Disclosure to clients on the firm’s approach to joint payments including for instance, the most significant research services purchased, and costs incurred;
6. Have operational procedures for the administration of accounts used to purchase research, and for the delegation of such responsibilities to others (where applicable);
7. Establish an annual budget for research purchases based on expected amounts of research needed, as opposed to volumes or value of transactions; and
8. Confirm that research services are not a factor in assessing best execution.

For the avoidance of doubt, this “new” payment option would exist alongside those already available, such as payment from asset managers’ own resources, or via dedicated research payment accounts.

Departures from draft rules in the Consultation Paper

The FCA did make a number of changes to its final rules, versus the original proposals. These amendments fall within five broad headings:

1. Budgeting – the FCA has clarified that there is flexibility to accommodate a level of aggregation that is appropriate to a firm’s investment process, products, services, and clients. They also now specify 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 charges.

2. Disclosures – requirements under this heading have been amended in two ways:

   a. the rule no longer requires the disclosure of the most significant research providers – instead, firms must disclose the types of providers from which research services are purchased.

   b. The level of aggregation at which such disclosures are to be made have been amended to mirror the changes to the budgeting requirement changes above.

3. Price benchmarking – the FCA’s consultation proposed a requirement to undertake benchmarking of prices paid for research against relevant comparators to ensure charges to clients are reasonable. This requirement has been amended to require that firms ensure research charges to clients are reasonable, alongside guidance that clarifies that benchmarking of prices paid for research services is but one way of demonstrating compliance.

4. Cost allocation and disclosure – requirements under this heading have been amended in two ways:

   a. Regarding fair allocation of costs, the FCA has provided latitude about the levels at which costs are allocated, provided they are appropriate to a firm’s investment process, products, services, and clients.

   b. The FCA has given more flexibility on how to estimate expected costs to clients, with asset managers permitted to calculate the expected costs according to whichever of two prescribed methodologies is most appropriate to it.

5. Separately identifiable research charges – in this regard, the FCA previously required that there be written agreements with research providers, whereas they now broadly require that “arrangements be in place that stipulate how this is done,” accommodating a broader range of market practices and arrangements, both bilateral between firms and multilateral with service providers.

One more thing…

The intention of the FCA is to have consistent rules on research and inducements for investment firms and collective portfolio managers.

The changes the FCA are introducing are not yet mirrored in COBS 18 Annex 1 relevant to UCITS managers, as well as AIFMs, but the FCA’s intention is to make the necessary amendments in due course.

What next?

The new rules are effective this week, specifically the 1st August 2024; as what the FCA is introducing is a new option, firms themselves are granted the flexibility to determine whether and when they wish to avail themselves of the joint payment option after this point.

The FCA aims to consult in the autumn on updated COBS 18 rules to reflect the new rules and ensure consistency across the different regulatory regimes.