Global asset managers seem to be divided over the UK’s Financial Conduct Authority’s (FCA) unbundling rules which came into force on 1 August.
The rules represent an unwinding of the MiFID II ban on the bundling of charges for trade execution and research, but with certain measures to protect end investors. The UK’s Investment Research Review concluded that the MiFID II unbundling requirements have had adverse impacts on the provision of investment research in the UK, with a potentially negative impact on economic growth.
After the FCA published its consultation paper on Payment optionality for investment research in April 2024, the industry came back to the FCA with clear concerns and requests, and the final Policy Statement issued last month revealed some changes made in response.
However, a recent survey by Substantive Research showed that global asset managers have mixed views on the matter. The aim of the survey was to gauge asset managers’ reaction to the final rules and to see whether the FCA’s changes to their initial proposals would change the industry response.
Key findings compare how the buy side feels now with the final rules in place, versus the reaction to the consultation paper in April.
Overall, the survey confirmed that the changes the FCA has made between the consultation paper and the final rules have eliminated some deal breakers for the more engaged firms keen to proceed.
The FCA has removed key operational barriers that were hampering the potential take-up of greater flexibility in research funding, and there is a group of asset managers gearing up to test market reaction, save money and potentially increase their access to research inputs, Substantive Research said.
But an equal number of buy-side sceptics point to a scenario where asset owners scupper any real momentum shifts. The group of managers who are “neutral and waiting to see how the rest of the market moves” has grown slightly to 45% of respondents, up from 42%.
The survey also showed that the potential early adopter group who are “broadly interested but not a first mover” has doubled to 18.2%, up from 9.1%.
Accordingly, the proportion of those “interested but put off by the detail of the FCA guardrails” (on budgeting, disclosure, cost allocation and valuation) has shrunk by 9%, down to 9.1%.
However, more than a quarter of firms do not intend to move budgets and are sceptical that this will gain traction with peers: 18.2% position themselves as “sceptical and not engaged” and 9.1% are “not interested in moving,” the survey found.
Many of these firms don’t think these changes would spur further coverage on UK SMEs, and regard the unbundling rollback as an unwelcome distraction, now that they finally have their post-MiFID II processes in place and working well.
Mike Carrodus, chief executive officer of Substantive Research, said: “The changes in asset managers’ attitudes are driven by changes in the FCA’s final rules when compared to the initial consultation. It’s clear that the biggest sticking point was the impression that the consultation paper was mandating strategy-level research budgets. This is something that many firms are loath to do, as they share research across the firm and would find allocating that spend at a granular level problematic.”
The research also showed that 60% of respondents cited “relaxation of the rules around strategy level budgets” as the most important change, followed by 18.2% saying the most important change was “removing the requirement for buy-side firms to have separate written agreements with providers”.
Carrodus added: “We are now faced with two sets of firms with completely opposing views, both representing approximately a fifth of the market, and nearly half of the buy side on a ‘wait and see’ mode.”
The market is also split when it comes to expectations on how fast the new rules will be adopted: the group of firms that expect no change within two years has grown by 7%, up to 42.4%.
In contrast, within the same two-year timeframe, 15.2% think that the majority of research budgets will be client-funded, with a significant 42.4% expecting that there will be a “broadly equal mix of client-funded and P&L” budgets by then.
“The source of this uncertainty is the conversation with the end investor. The FCA has clarified that it only needs asset owners to be informed of the new policies and changes if asset managers do move to “joint payments”, so explicit consent is not required,” Carrodus said.
However, he noted that many senior executives on the buy side do not want to open up the fees discussion during such a challenging time for asset gathering and retention.
“As these are new costs being reintroduced after six years of asset managers paying for them out of their own pockets, they anticipate pushback from clients and do not want to have to try and figure out what to do if a handful of clients object and opt out of paying while the rest acquiesce,” he explained.
Substantive Research’s survey surveyed 33 of the largest asset managers with total assets over $11trn, spanning North America (36%), European Union (12%), and UK (52%).
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