TheCityUK's proposal to the Financial Conduct Authority on allowing optionality for investment research payments

The Financial Conduct Authority (FCA) is reviewing the reintroduction of optionality for investment research payment. Removal of the restriction on combining the cost of research with execution charges will allow firms to choose how they pay for research. This initiative, stemming from the Investment Research Review led by Rachel Kent, is geared towards enhancing the UK’s attractiveness as a premier listing destination. The Chancellor’s 2023 Mansion House speech signalled the government’s acceptance of these proposals, highlighting the critical role of investment research in boosting investor confidence and greater market liquidity.

We have submitted a short paper to the FCA setting out industry wide support for this reform. This brings together diverse industry perspectives, including buy-side and sell-side firms, UK exchanges and other trade associations.

In summary, it is our view that the optimal regime would be one where the asset manager has the freedom to make informed decisions to determine the best method of payment.     

Our key recommendations are:

1. Deliver timely reform: The FCA should, as soon as possible, remove existing rules that prohibit the bundling of research and execution fees to allow additional optionality for paying for such research.
2. Boost international competitiveness: Delay in implementing additional payment optionality for research could disadvantage UK firms particularly those operating in the US and EU.  The FCA’s new secondary competitiveness objective underscores the need for the UK to have a regulatory regime that is not overly restrictive or inflexible than other jurisdictions.
3. Develop a tailored approach for the UK market: Special consideration is needed for the UK’s unique listing ecosystem, where the majority (80%) of companies have a market capitalisation of below £1bn. The availability of research for these smaller cap companies is crucial for maintaining market liquidity and competitiveness.
4. Deliver a sensible implementation: Any new requirements must be practical and avoid onerous or complex reporting demands to ensure effective implementation.

We are committed to continuing to work closely with the industry and the FCA on refining the UK’s regulatory regime for research, and look forward to receiving the FCA’s upcoming Consultation Paper.

To read our full submission, click ‘Read here’.