The Financial Conduct Authority wants to bring back bundling of payments to make it easier for asset managers to pay for investment research.
Rules preventing the bundling of payments for research and trading were first introduced in 2018, and "for good reason" the regulator said, but it added it had concerns they could favour larger firms.
They might also restrict UK asset managers’ ability to buy investment research from outside the UK, which it also wants to tackle with its latest proposals.
Tougher rules on bundling were introduced as part of Mifid II and the FCA's latest action forms part of the government's post-Brexit Edinburgh reform package.
FCA chief executive Nikhil Rathi said: “The rules preventing bundling were introduced in 2018 for good reason.
“There was a concern that the practice led to less disciplined spending on duplicative or low-quality research, inappropriate influence of research procurement considerations on trade allocation decisions, and opaque charging structures.
"Re-bundling of payments for research with trade execution charges could risk these harms re-emerging. That is why we are suggesting appropriate guardrails to protect investors.
“These are designed to ensure sufficient discipline around budgets for research spending, fair allocation of costs to clients, value assessment, price benchmarking of research purchased, and cost transparency.”
A downside of bundling research payments previously was that the majority of advisers and their clients had no idea how much fund managers were paying for third-party research, and therefore had no idea how much of this expense was being absorbed by the provider – or passed onto the client through higher fees.
Under Mifid II asset managers were forced to put in place systems that can manage unbundled payments for execution and advisory service, and be able to show the research and pricing models for those services.
But these rules have been criticised because they have supposedly led to less coverage of small and medium-sized stocks. They also increased costs for asset managers, which put pressure on smaller companies in this sector.
The FCA's latest proposals, designed to give asset managers greater freedom in how they pay for research, will allow the bundling of payments for third-party research and trade execution.
They would exist alongside existing options such as payment from an asset manager's own resources or from a dedicated account.
The FCA said the plans were also compatible with rules governing research payments in some other jurisdictions, which should make it easier for asset managers to buy research in the same way, across borders.
Sarah Pritchard, executive director of markets and international at the FCA, said: “High quality, easily accessible investment research is a vital part of a healthy, dynamic capital market. It supports the decisions investors make.”
The consultation on the proposed rules opened yesterday (April 10) and will close on June 5.
The regulator aims to produce the final rules in the first half of this year.
tara.o'connor@ft.com
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