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FCA unbundling proposal: a nuclear threat to equity research

The FCA’s proposal to ban funding research from commission payments is a groundbreaking step, marking the first action of its kind seen in over 200 years.

The consultation period following the publication of the FCA’s “thematic review” ended earlier this month. It’s worth recapping why the financial regulator has lost patience with asset managers’ ability to push forward with reforms. 

The thematic review highlighted serious issues, including research payments still largely linked to trading volumes, few firms having research budgets or caps on research spend and some managers still not using CSAs.

Leading on from these issues, it was found that brokers’ practices of bundling execution and research services together makes it harder for investment managers to accurately review the value of research.

The FCA’s report found that 11 out of 17 firms investigated still linked payment for research to the volume of trades. One firm was found to be still using dealing commissions to pay for all of its market data – contravening the FCA’s 2006 guidelines.

The unsatisfactory survey results have led the FCA to lose faith in a gradual reform process. As a result, it has proposed an outright ban on using client commission to pay for research.

The UK regulator has thrown its weight behind ESMA proposals, focusing on MiFID II which requires the majority of research to be paid for from asset managers’ own funds as opposed to relying on client money.

The industry is now in limbo while the FCA comes to a final decision; the timeline for which remains unclear. 



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