In PS24/9 (Payment Optionality for Investment Research), the FCA sets out final rules for a new option to pay for investment research and sets out its feedback to its earlier consultation in CP24/7. To remind everyone, the new option will exist alongside those already available, i.e. payments for research from a firm’s own resources and payment for research from a research payment account for specific clients. Some are sceptical about the extent to which FCA consultations really contemplate change to the original proposals at the policy statement stage. That would be unfair in the context of this consultation as the FCA has made some substantive changes to its original proposals. Without running through all of these, the biggest changes are in relation to the guardrails which firms will be required to comply with in relation to the new option. In particular:

• firms will be able to budget at the level of investment strategy or group of clients and to disclose at an aggregated rather than client level; 
• softening the price benchmarking proposals to the price being reasonable; 
• allowing ex-ante cost disclosure to be based on budget setting and cost allocation or on actual cost but not needing to be based on both; and 
• flexibility in the way the arrangements with research providers are structured and documented. 

The above changes are welcome as recognition that the regime needs to be practical if it is going to be usable. However, the big question the paper does not really answer is how firms can reasonably allocate costs to the research piece of a bundled research and execution cost. Those of us who go back to the old, bundled world will be conscious that when these questions were asked it proved difficult to create a reasonable methodology for value. Debates have always ranged around the “real” value of the research component and such intangibles as the market profile of a “star” analyst and the extent to which the historic record of research accuracy should be built into the valuation methodology. These are not new problems but without more of an industry agreement on a valuation methodology and without some further cover from the FCA, one wonders how confident firms will feel in going for a bundled but accurately split fee. This places considerable burden on the valuation methodology mechanics. Given the fact that the current regime has been in operation some years now, one wonders how popular the new “hybrid” bundled fee but separately accounted for model is really going to be. In addition, to the extent that one of the motivators here is to encourage smaller cap research and stimulate the UK equity markets, query if this reform is really going to do this given the fair amount of cost associated with the guardrails. As the FCA is at pains to point out, this is not a fully bundled commission sharing arrangement (CSA) or an old-style soft dollar arrangement. What they may not have perhaps focussed on as much is the barrier to entry the cost associated with the proposed model. This may depend on how confident we should be on the cost benefit analysis in the consultation. 

Lurking beneath the above pragmatic concerns, there is also the deeper question of whether all of the original policy reasons why the FCA and the FSA before it felt so strongly about unbundling have really gone away. To remind us, there were a series of arguments based on conflicts of interest, over consumption of research by managers when the underlying client was paying and the whole issue of asymmetric information between manager and client which the FCA and FSA spent years researching and producing papers on. In the consultation and policy statement, these historic concerns are largely ignored rather than dealt with which is understandable given the concerns about under production of research for smaller caps. However, have these issues really gone away, particularly given that the regime will apply to the larger liquid stocks as well? 

So, to summarise, the FCA has moved a reasonable distance to making the regime workable. Time will tell if the industry will take up this option or stick to what it has become used to and underlying it all there is a legitimate question to be asked on whether this is the end of this particular battle or whether as is often the way in regulation the pendulum will swing back the other way towards hostility to the perceived conflicts of interest. We shall see.