Institutional Asset Manager Newsletter 10.05.24

UK’s research rules up for debate

The ban on bundling research and execution charges has long been a bugbear of the buyside.
Firms argue that the rules first imposed under MiFID II and since tempered but not removed entirely by the FCA, have had a potential negative impact on UK equity capital markets and UK asset managers’ competitiveness by reducing access to global investment research.
In efforts to keep the UK financial services sector competitive post-Brexit, the government ordered the FCA to conduct a consultation on allowing firms carrying on MiFID business to bundle payments for third-party research and execution services in all circumstances, which will sit as a third option alongside the P&L and the research payment account models.
Yet despite long-held protestations that the UK’s rules are "at odds with the equivalent regulations in the US, adding challenging complexity for global asset managers consuming investment research from different jurisdictions", most firms are sticking with the P&L model.
This week we bring you a Substantive Research survey of 35 of the largest asset managers, representing AUM of more than USD11 trillion, which found 76.5 per cent do not intend to make changes to their research process. Given that 85 per cent of those responding to the survey currently operate on the P&L research funding model, moves to change the rules seem somewhat moot.
As Substantive says: "The message here is that the research procurement process is rigorous and comprehensive already."
However more than half (56 per cent) of those surveyed believe that the suggested amendments to MiFID II will "remove the operational barriers to allow them to once again charge their end clients for the investment research they consume".
Mike Carrodus, CEO of Substantive Research, says: "The key question remains: ‘How will end investor clients react to these returning costs, and how will asset managers’ adoption or avoidance of these new freedoms affect their competitive positioning?’"
Carrodus sensibly calls for a set of standards that firms believe provide a framework to compare against, which the FCA can verify, "ultimately providing more comfort to asset owners".
The FCA consultation closes on 5 June.
In other news, custody concerns remain the biggest barrier to institutional investors moving into crypto and digital assets.
According to a study from Nickel Digital Asset Management covering investors with more than USD800 billion in assets, custody outranks volatility as a deterrent to investing.
The findings rather undermine efforts made by the industry to mitigate custody and counterparty risks through the adoption of off-exchange settlement solutions.
Anatoly Crachilov, CEO and Founding Partner at Nickel Digital, accepts knowledge of progress is limited outside of the ‘digital native’ community, but adds the involvement of big-name players including BlackRock and Fidelity gives credence to improved security in the crypto space.

Gill Wadsworth, Editor
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