A majority of asset managers (55.9%) anticipate that the suggested amendments to MiFID II will remove operational barriers to allow them to once again charge their end clients for the investment research they consume, according to a survey conducted by Substantive Research.

The survey intends to gauge the buy side’s appetite to make changes to investment research funding following the latest consultation paper from the Financial Conduct Authority (FCA) on payment optionality in investment research.

The FCA’s paper sets out potential changes to the investment research procurement process, following the July 2023 Investment Research Review led by Rachel Kent, which suggested allowing buy side firms optionality on how they fund their investment research – whether they fund research from their own profit and loss (P&L) or via ‘bundling’ research fees with execution fees.

The Substantive Research survey of 35 of the largest asset managers representing more than $11trn in assets under management found that as a result of the proposed changes, a majority of asset managers expects over the next two years the market to shift to operating an equal mix of client-funded and P&L-funded research (47.1%).

Additionally, 35.3% of particiapting asset managers expect the existing P&L firms to make no changes, while 17.6% expect the majority of budgets to move to client funded.

This change is expected to be “an evolution” rather than a “large-scale” move in the market because of “strategy level” disclosures and other requirements that could mean a significant administrative burden and have deterred some firms from being early adopters.

Of the surveyed asset managers, 85% currently operates on the P&L research funding model, with 75% of those surveyed saying they do not intend to make changes to their research process as result of the upcoming changes.

Mike Carrodus, chief executive officer of Substantive Research, said: “The buy side reaction to the FCA’s consultation paper is a three-way split, between those that want to transition to a client-funded research budget rapidly, those that will never do it unless they are literally the last P&L research payers left, and finally a large cohort that would be interested in reducing their own costs in a challenging market, but would like to watch this play out for a while.”

He said that 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 added: “What a buy side needs right now is a code – a set of standards that firms feel that they can sign up to.”

He said: “There will be different interpretations of the current wording of the FCA paper, and uncertainty on issues like what constitutes a ‘Strategy Level Budget’ and associated levels of disclosure. The buy side will want detailed frameworks to compare against, which the FCA can verify, ultimately providing more comfort to asset owners.”

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