FCA Research: Can we just go back to a Commission Sharing Agreement now?

At the publication of the Rachel Kent report, some thought that a pre-MiFID II CSA agreements could be dusted down and picked up again.

This is almost where the FCA has taken the market, but with some caveats. 

Bundled payments are allowed (alongside the existing options of paying out of P&L and using a research payment account). 

To go bundled a firm needs to have :

• a formal policy containing the firms' approach to bundled payments (this would include details on governance decision making and controls);
• an agreement with research providers on the methodology for calculating and separately identifying the cost of research;
• a structure for the allocation of payments between research providers;
• an approach for the allocation of costs across clients of the cost of research bought through bundled payments (this would be appropriate to the business model of the firm but would ensure that the relative costs to be incurred by the firm are commensurate with relative benefits received);
• periodic assessment of the value, quality, use and contribution to investment decision-making of the research purchased;
• disclosure to clients on the firm's approach to bundled payments (if and how bundled payments are combined with any other payment option and the most significant research providers and costs incurred);
• operational procedures for the administration of accounts used to purchase research (this can be delegated to a third party but the firm would retain overall responsibility); and
• a budget to establish the amount needed for third party research (this is to be reviewed and renewed annually).

So, it's more CSA+, with the + being a series of internal controls and some disclosure. 

Additional amendments & US solution

Other changes proposed by the FCA include:

• amendments to rules introduced via Policy Statement PS21/20, such as deleting the option for bundled payments to purchase research on companies with a market capitalisation below £200 million from the list of acceptable minor non-monetary benefits in COBS 2.3A.19R(5)(g), whilst retaining COBS 2.3A.19R(5)(h) to (k) (this includes treating corporate access in relation to companies with a market capitalisation of less than £200 million as a minor monetary benefit); and
• adding short-term trading commentary and advice linked to trade execution to the list of acceptable minor non-monetary benefits in COBS 2.3A.19R(5) (this allows UK buy side firms to receive short-term commentary from a US broker dealer).

The where & how

The proposed changes to COBS are set out in the draft payment Optionality (Investment Research) Instrument 2024 in Appendix 1 to CP24/7. The FCA notes that the proposed amendments it sets out in respect of the list of non-monetary benefits in COBS 2.3A, as well as the introduction of payment optionality in COBS 2.3B are not currently reflected in the list of minor non-monetary benefits in COBS 18 Annex 1 relevant to: UCITS management companies; full-scope AIFMs; small authorised AIFMs; and residual Collective Investment Scheme Operators. It states that it will consult on these in 2024.

EU Divergence?

The UK and EU are walking a similar (nearly the same) path on re-bundling (unsurprisingly, given this was mainly pushed by the UK). In particular, EU proposed reforms are proposing allowing bundled payments for research and execution. 

However, firms will have to, amongst others things, make sure: 

a) re-bundling is transparent; and 

b) clients can ask for cost of research provision.