The Financial Conduct Authority (FCA) has published new rules allowing fund managers to pay for investment research using a joint payment option for research and execution services, subject to complying with a set of guardrails.

In this article, we explore the context behind the introduction of the new rules surrounding investment research, who the new rules apply to, and the requirements of fund managers to take up the new joint payment option.

Background

Historically, research costs were typically bundled with trading execution commission. However, the Markets in Financial Instruments Directive II (MiFID II) mandated that these fees be separated – leading fund managers to either cover research internally or through separate research payment accounts (RPAs). This change stemmed from concerns that the practice of bundling led to less disciplined spending on duplicative or low-quality research, as well as the inappropriate influence of research procurement in determining trade allocation decisions, and opaque charging structures.

In 2023, the UK Investment Research Review (IRR), commissioned by the UK Government, published its findings into investment research in UK capital markets. It concluded that the MiFID II unbundling requirements adversely affected the provision of investment research in the UK and recommended that a more flexible approach be adopted.

Following the IRR, the FCA published a consultation paper on payment optionality for investment research and implemented new rules in its Policy Statement to introduce a joint payment option for MiFID firms as a priority in July 2024, including those managing segregated accounts. The FCA then followed up with a consultation on investment research payment optionality for fund managers which proposed changes to the existing rules that set restrictions on how fund managers can pay for research, similarly proposing a joint payment option.

These new rules will apply to:

  • UK UCITS management companies
  • Full scope UK Alternative Investment Fund Managers (AIFMs)
  • Small authorised UK AIFMs and residual collective investment scheme operators

Operating an RPA can be resource intensive and operationally complex with a proportionately larger impact on smaller fund managers. The FCA therefore expects the new rules to particularly enhance the competitiveness of small and fast-growing fund managers and new entrants to the market.

The changes

Fund managers who wish to purchase investment research can now use joint payments for third-party research and execution services, subject to complying with a set of guardrails to mitigate against the risks of bundling and secure an appropriate degree of protection for investors in funds.

The guardrails are designed to ensure discipline on budgets for research spending, cost allocation, value assessment and disclosure requirements.

To take up the joint payment option, fund managers will be required to:

  • Establish written policies on their approach for each fund that purchases research using the joint payment option. The policies must specify the operation of the firm's governance, decision-making and controls in respect of third-party research purchased using joint payments, including how these are maintained separately from those for trade execution. This could be one set of written policies across fund ranges which can be appropriately modified and adopted for a particular fund range or fund structure;
  • stipulate the methodology for how the research cost will be calculated and identified separately within total charges for joint payments;
  • establish a research provider payment allocation structure for the allocation of payments between different research providers;
  • assume responsibility for the operation and administration of the account for purchasing research from joint payments, timely reconciliation and reporting of the joint payment account with an appropriate frequency;
  • at least annually, set budgets for the purchase of research using joint payments based on the expected amount of third-party research needed to manage the investments of the fund or the investments of more than one fund. The budget must be set at a level of aggregation which is appropriate to firms' investment processes, products, services and clients and must not be linked to the expected volumes or values of transactions executed on behalf of the fund or funds;
  • allocate the cost of research fairly to the relevant fund or funds, considering the budget set at the level of each fund. The fund can contribute towards a wider pool of research with other funds that have similar investments, with the costs of research then being allocated fairly between funds that contributed to the wider pool of research;
  • provide disclosure on joint payments to relevant clients, including the firm's use of joint payments for research, the key features of the firm's policy on joint payments having regard to the information needs of its clients, the expected annual costs to the client and the benefits and services received from research provide; and
  • assess the value, quality and use of research purchased using joint payments and its contribution to the investment decision-making process periodically, and at least annually. Value needs to be assessed on a fund-by-fund basis to ensure that each fund can benefit from research that is relevant to the fund. For authorised funds, the take-up of the joint payment option is a significant change, requiring fund managers to notify unitholders before the changes take effect.

Timings and next steps

The FCA's final rules came into force on 9 May 2025, and fund managers can now adopt the joint payment option.

For further information on the new rules, contact Kris Rogers or Sushil Kuner from our Financial Services Team.

To stay up to date with the latest news in Financial Services, sign up to our newsletter for regular updates.