• Reacting to the FCA’s November 2024 Consultation Paper in research unbundling, many asset managers are now keen to take advantage of new freedoms and pass research costs back onto investors
• However, 60% of respondents stated that the requirements in the FCA’s Consultation Paper were not workable
• 50% of all firms want to see relaxation of the proposed rules around fund level budgeting

Substantive Research, the research and market data discovery and spend analytics provider, releases the results of a survey of the largest asset management firms’ reactions to the latest FCA Consultation Paper on research unbundling and the new “joint payments” freedoms.

Background

In July 2024 the FCA released new rules within COBS2, making it easier for asset managers to pass their external research costs back onto end investors, as they did pre-MiFID II. This policy statement only covered segregated mandates, and it became clear that for this “joint payments” option to be broadly taken up in the UK, any new freedoms would need to be extended to pooled funds. In November 2024 the FCA then released its Consultation Paper (CP24/21) outlining the proposed changes and how they would be translated for the Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers Directive (AIFMD) markets, and Substantive Research surveyed a selection of larger buy side clients to gauge their reactions.

The Substantive Research survey of asset managers found that:

• Only 16% of respondents were fully supportive of the new structure proposed, with 60% neutral and 24% disappointed
• 36% were interested in taking advantage of new freedoms but were now put off by the detail of the guardrails outlined in CP24/21
• 24% were happy with the language and broadly interested in moving to client-funded budgets in the future
• However, 60% of respondents stated that the requirements in CP24/21 were not workable
• 50% stated that the key issue that needs to be addressed would be a relaxation of the rules around fund level budgeting, followed by 28% highlighting the need to address rules covering greater disclosure requirements if research charges go over budget.

Mike Carrodus, CEO of Substantive Research said: “When the FCA released its Policy Statement in July 2024, many asset managers who wanted to take advantage of these new freedoms heaved a sigh of relief as PS24/9 effectively clarified that budgeting for research at a strategy-level or a firm-level would be acceptable. This was important because many firms stated that it would be extremely challenging to attribute research value at a fund level. However, with the November Consultation Paper that covers UCITS and AIFMD now mandating fund-level budgeting, our survey outlines that many firms will not adopt the new structure unless an effective compromise is reached.”

He added: “The survey also shows that for a significant minority of firms, the new, more hawkish rules could be less of an impediment. Almost a quarter (24%) of respondents indicated that they were still interested in moving to client-funded budgets and therefore could budget at a fund level. This positive response also points to fewer concerns from them regarding negative responses from asset owners, an obstacle which still gives others pause and leaves over a third of asset managers in a “wait and see” category.”

Finally, Mike Carrodus said: “It is important to note that the new fund-level disclosure stipulations in CP24/21 are outlined as part of a review, so consultation and feedback may ensure a more popular outcome with the buy side. Asset managers with large retail client bases who are also keen to move, will all have their fingers firmly crossed.”

Universe of firms covered by the research:

• 30 of the largest asset managers surveyed
• AUM : > $10 Trillion
• Geographic split: 30% N. America, 20% EU, 50% UK

Source: Substantive Research