The FCA’s proposed rules on the use of investment research and dealing commission is set to cause fund groups a compliance headache and challenge firms on the value of research.
In its consultation paper on Mifid II, published last week, the FCA sets out plans to prevent firms from receiving non-monetary benefits from third parties, including research.
To receive research, firms will have to either pay directly from their own resources, or pay from a separate research payment account. Firms must also set a research budget which is not linked to the volume or value of transactions on behalf of clients.
Investment research costs can also be collected from clients. The rules aim to ensure any research costs that are incurred are in clients’ best interests.
Research firm Third Bridge managing director Joshua Maxey says fund houses are already cutting down on their analyst research budgets to reduce “any misappropriation of funds”, but says the new rules will be “quite onerous”, particularly for smaller players.
He says: “Fund managers of all sizes will likely face a research headache in meeting Mifid II requirements. The ability to draw from external research resources with transparency will be crucial to navigating these tougher industry standards.”
Former Investment Association chief executive Daniel Godfrey has branded the rules as “the beginning of the end” for the use of dealing commission to buy research.
Gbi2 managing director Graham Bentley questions whether “minor non-monetary benefits” should be allowed under the rules.
He says: “How do you consider the substance of content such that some has to be paid for and others perhaps not?
“If some research is widely distributed then it will probably qualify as minor. On the other hand access to analysts, bespoke reports or analytical models will need to be paid for.
“The outcome of all this is ‘valuable’ research has a price, and freely distributed research will be deemed valueless. Researchers will have to do more than circulate mundane analysts’ reports, and up their game to compete for fund group’s research budgets – and many won’t survive.”