The Financial Conduct Authority (“FCA”) has confirmed final rules that allow fund managers to pay for investment research and execution services together under a joint payment option, subject to a set of defined operational and disclosure requirements.

The rules, published in Policy Statement PS25/4 on 9 May, follow Consultation Paper CP24/21 and mirror rules introduced last year for MiFID investment firms.

This development gives UK fund managers a third method for funding external research, in addition to the existing P&L model and RPA model. The joint payment option may be of particular interest to groups with both MiFID and fund management entities as it offers the potential for a more consistent approach across business lines.

Background

Prior to the implementation of MiFID II in January 2018, fund managers and investment firms typically paid for research through charges bundled with execution (trading) commissions. MiFID II introduced requirements to unbundle research and execution costs, with firms permitted to pay for research either from their own resources (the “P&L model”) or through separate research payment accounts (“RPA”) funded by charges to clients. The changes were designed to protect investors by making costs clearer, reduce conflicts and promote better research and execution practices.

In practice, most UK asset managers opted for the P&L model due to the complexity of RPAs. This shift led to a significant reduction in third-party research spend, with knock-on effects for the coverage of smaller companies and independent providers.

In late 2022, the former Chancellor announced a government-commissioned independent review into the UK investment research market. The review, published in July 2023, acknowledged that while unbundling delivered some benefits, it also contributed to reduced availability and quality of external research, particularly in less liquid areas of the market. One of the review’s key recommendations was to introduce further payment optionality for research services to reduce barriers and frictions for firms purchasing research in jurisdictions where bundled payments are standard practice.  As context, in the US the use of “soft commissions” and commission sharing agreements is prevalent and the EU has introduced legislative amendments to the MiFID II unbundling rules as part of the Listing Act.

In August 2024, the FCA introduced a joint payment option for MiFID investment firms via PS24/9. Later in 2024, the FCA launched CP24/21, consulting on similar rules for fund managers. PS25/4 confirms the final position following that consultation, which shares certain features with the EU developments.

Who is affected?

The new rules apply to UK UCITS management companies, full-scope UK AIFMs, small authorised UK AIFMs and residual collective investment scheme operators. The rules might also be relevant to depositaries, investment platforms, investment consultants, and investors in authorised funds or alternative investment funds.

What has changed?

Fund managers may now use a joint payment option for research and execution services, subject to guardrails which are intended to protect investors and reinforce operational discipline. This option sits alongside the existing P&L and RPA models, which remain available.

The guardrails have been adjusted from the consultation draft in response to industry feedback.

Final guardrail requirements

To adopt the joint payment model, fund managers must:

• Establish written policies on their approach to joint payments.
• Stipulate the methodology for how the research cost will be calculated and identified separately within total charges for joint payments.
• Establish a research provider payment allocation structure.
• Set budgets for the purchase of research with joint payments.
• Allocate the cost of research fairly to any funds they manage where the budget applies.
• Provide disclosure on joint payments.
• Assess the price and value of research periodically. Value will have to be assessed on a fund-by-fund basis.
• Be responsible for the administration of the accounts for purchasing research with joint payments. 

Additional points to note

The adoption of the joint payment option is considered to be a significant change under the FCA’s COLL Sourcebook. This means that notification to unitholders and the FCA is required before implementing the model for an authorised retail fund.

Best execution requirements will continue to apply such that the receipt of research must not be treated as a factor in assessing best execution under existing fund rules.

The FCA had noted in CP24/7 that in the US, certain types of short-term trading commentary may be provided by a broker-dealer which may not be able to receive unbundled payments. The FCA anticipated that this could create unintended differences in access to research and, for this reason, has extended the list of acceptable minor non-monetary benefits (“MNMBs”) to include short-term trading commentary that does not contain substantive analysis, and bespoke trade advisory services intrinsically linked to execution.

On the other hand, the exemption for bundled payments to purchase research on companies with a market capitalisation below £200 million that was introduced through PS 21/20 has been removed from the list of MNMBs. The majority of responses to CP24/21 supported its removal with some having expressed the view that the exemption was not appropriately calibrated with its threshold having been set too low.

Key differences from CP24/21

Next steps for fund managers

Fund management companies should review the new rules in COBS 18 Annex 1 and COLL in detail and assess the suitability of the joint payment option across fund ranges.  Changing the method of research payment model from either the P&L or RPA model to the joint payment option will require detailed consideration by fund managers of the changes required to their operating model for paying for investment research.

For fund groups with both MiFID firms and fund managers, there is now an opportunity to harmonise internal procedures across entities.

Final thoughts

The FCA’s reforms provide welcome flexibility, especially for smaller fund managers seeking to maintain or expand access to high-quality external research. The joint payment option may also enable greater operational efficiency for groups managing both funds and segregated mandates.

However, the guardrails are not light-touch and do have broader coverage than equivalent EU developments in this area. Firms will need to ensure that documentation, oversight and value assessments are robust – and that operational processes can support the ongoing requirements tied to joint payments.

For further assistance in interpreting the rules or implementing the joint payment model across your fund range, please get in touch with one of our FS Regulatory team.

Related News, Insights & Events