The Financial Conduct Authority (FCA) is expected to decide whether AIFMD and UCITS funds will be granted the same research payment optionality as MiFID-governed firms next month.
“Buy side firms have been on a MiFID II rollercoaster ride so far,” Mike Carrodus, CEO of Substantive Research, recalled. “There was a feeling that regulation has been too heavy, but now we may move to a place of greater flexibility for research budgeting, balanced with continuing controls around governance and value for end investors.”
“Without alignment across the rules governing both segregated mandates as well as pooled funds, the group that will or can go to joint payments is naturally constrained within a smaller universe,” Carrodus explained. “But what is the point of softening these rules if they are unworkable?”
“The whole point is to have a single process, otherwise the motivation to make the transition to joint payments will be removed for many,” he said. “Clients are hopeful that strategy- or firm-level budgeting for research for pooled funds will be confirmed this May but we’ll have to wait and see.”
In November 2024, the FCA’s consultation paper on the Conduct of Business Sourcebook (COBS) 2 proposed relaxing its rules so that individual investors need only be informed, rather than explicitly consent to, changes in research payments.
“That concession was quite a big one,” Carrodus said. “It could be that making the second concession to budget at a strategy or firm level instead of a fund level felt like too big a step, so the consultation paper didn’t include it. That caused quite a lot of consternation.”
At the moment, many clients are “positively predisposed” to making the move, he said. “While many don’t want to be in the first wave of firms moving across, they’re now in the mindset of actively looking for things that confirm that this is going to be okay.”
“If and when we get the confirmation that strategy or firm-level budgeting in May is acceptable, it will be full steam ahead for earlier adopters. Not all of them will make it by the end of this year because, like all things, when you actually start a complex change process you encounter complications.”
He referenced Chancellor Rachel Reeves’s letter to FCA CEO Nikhil Rathi earlier this year, which emphasised the need to avoid over regulation and boost competitiveness of the UK market.
The deregulation drive is being adopted more broadly, with the FCA recently proposing slashing 70% of the regulatory capital rules text as it seeks to simplify its rulebook.
Regulatory capital rules require investment firms to hold an amount of capital in particular types of funds that will allow them to absorb losses and remain resilient during times of stress.
Initially designed for banks, the FCA states that the rules are overly complex and not suited to investment firms’ business models.
As such, it argues, the legal text can be condensed by almost three quarters. If accepted, the proposal will see EU-derived elements of the rules removed.
Capital requirements will remain unchanged, and the authority does not expect firms to change their capital arrangements as a result of the amendments.
