Navigating the FCA’s New Payment Options for Investment Research: A Guide for Firms

 

The FCA published Policy Statement PS24/9, “Payment Optionality for Investment Research”, introducing a new payment option for firms to access and fund investment research. This new regulation builds on the FCA’s ongoing reforms aimed at strengthening the UK’s position in global wholesale markets, aligning payment structures with international standards, and offering greater flexibility to investment firms. Objectivus can advise firms on the changes discussed below and are well placed to assist with the implementation of any processes to meet the regulatory obligations imposed through the Policy Statement. Here’s what market participants need to know about these changes and the actions they can take. 

The Need for Greater Flexibility in Investment Research Payments 

Historically, research costs were bundled with execution fees, a practice that was altered by MiFID II, which mandated the unbundling of these services. This created two primary options for firms: either pay for research from their own resources or charge clients via a research payment account (RPA). 

While these changes enhanced transparency, they also increased operational complexity, especially for smaller asset managers and new entrants. PS24/9 has somewhat reversed the MiFID II approach by introducing a third payment option, allowing ‘joint payments’ for research and execution services provided that the firm meets the requirements for doing so. 

Those requirements being: 

1. Establish a written policy is in place, setting out their approach to joint payments; 

1. To establish a methodology to calculate and separately identify research costs; 

1. Establishing clear processes by which they will allocate payments between different research providers; 

1. Establish a clear, written process for allocating the cost of research purchased under joint payments across different clients. This approach needs to be fair in that the cost passed on to any client must be in proportion to the benefit that client received from that research; 

1. Conduct a periodic (as a minimum annual) assessment of the value, quality and use of research purchased, and how and to what extent that research contributed to investment decision-making; 

1. Disclose joint payments to clients, including costs incurred and the types of providers from which research services are purchased; 

1. Review (at least annually), how any charges levied on clients in relation to research are reasonable against comparators; 

1. Establish a budget to determine the amounts needed to purchase third-party research, which must be reviewed at least annually; and 

1. Effective procedures for the administration of accounts used for purchasing research. 

 

What Firms Should Do Next 

To ensure compliance with the new Policy Statement and optimise the benefits of the new payment option, firms are encouraged to: 

• Review Payment Models: Firms should assess their current payment models and determine whether joint payments for research and execution services offer a more efficient solution compared to the existing RPA or own-resources models. This will be particularly relevant for smaller firms or those with complex research procurement processes. 

• Develop a Clear Governance Policy: To comply with the new rules, firms must establish a written policy outlining their approach to joint payments. This policy should include governance structures, decision-making processes, and controls to ensure compliance with the FCA’s requirements. 

• Enhance Transparency and Disclosure: One of the key guardrails introduced by the FCA is the requirement for firms to ensure transparency in their payment structures. Accordingly, firms should be looking to prepare their disclosures, setting out their approach to joint payments, how they allocate research costs across clients, and provide transparency on the value of the research procured.   

• Assess Research Value and Budgeting: Firms need to establish a formal process to periodically assess the value and quality of research, ensuring the process accounts for the requirement to allocate research costs appropriately and disclose how research charges are determined. Firms should also be establishing clear budgeting practices for research spending, ensuring that costs align with the benefits received by clients. 

• Ensure Fair Cost Allocation: Firms should be developing their methodologies to allocate research charges based on the services provided to each client, ensuring that costs are proportionate to the benefits received. 

Implementation 

The changes went into effect on 1 August 2024. Firms should prioritise this review to adapt their payment models and put in place the necessary governance structures. While the new option is not mandatory, it offers firms the flexibility to choose the most appropriate payment method for their business model, allowing them to reduce operational costs and improve competitiveness. 

For further guidance or to discuss how these changes affect your firm, please contact Dan Harasemchuk at rdh@objectivus.com or Bhavisha Patel at bp@objectivus.com or call Objectivus at +44 (0)2034 573 283