UK to ease rules on how financial firms pay for investment research

London — Asset managers in the UK will be allowed to combine the cost of research on stocks and execution of trades charged by brokers, the Financial Conduct Authority (FCA) proposed on Wednesday, in a post-Brexit easing of rules that chimes with changes in the EU.

The EU reached agreement in February to introduce similar flexibility as part of its new Listing Act to make EU capital markets more attractive. Some UK MPs have complained that itemising charges has led to a drop in the provision of research for and investment in smaller companies.

“Our proposed option shares certain features in common with these recent EU legislative outcomes,” the FCA said in its consultation paper.

Since 2018 the cost of research and execution of stock trades charged by brokers has been separated to help clients of asset managers determine value for money.

“Overall, we conclude there is little evidence of negative impacts arising from MiFID 2 [the Markets in Financial Instruments Directive] on the international competitiveness and growth of UK equity markets and listed companies,” the FCA said in its proposals for public consultation.

Britain had promoted the unbundling rules when it was in the EU to improve transparency for investors.

But its exit from the EU in 2020 allows it to write its own financial rules to better compete with EU financial centres as well as New York.

Rolling back the EU’s unbundling rule has long been seen as a “Brexit dividend” and was proposed under the government’s “Edinburgh Reforms” to improve London’s competitiveness as a global financial centre, piling pressure on the FCA to act.

The government commissioned City lawyer Rachel Kent to look into easing the bundling rules, and she recommended last year giving more “optionality” into how research is paid for.

The FCA said its analysis shows asset managers are largely getting the research they need under the current rules, but paying for it can be complex, rules favour larger asset managers, and make it hard to source research from the US, which allows bundling.

The watchdog said it was now proposing to give asset managers greater freedom in how they pay for research, and in a way that should suit varying business models and sizes to promote competition.

“It will allow the ‘bundling’ of payments for third-party research and trade execution, and would exist alongside those already available, such as payment from an asset manager’s own resources or from a dedicated account,” the FCA said in a statement.

UK spending on investment research since 2018 has dropped by 30%-40%, but such falls were also seen in countries that don’t apply MiFID and do not reflect the rise of in-house research at asset managers, the FCA said.

The watchdog said it aims to produce final rules in the first half of 2024, but the timetable will be determined by the amount, strength and breadth of the information gathered in the consultation.

Reuters