Investment research: FCA introduces additional payment optionality for fund managers

The FCA has introduced new rules enabling fund managers to purchase investment research using a joint payment option for research and execution services, subject to compliance with certain requirements (referred to by the FCA as "guardrails").

The new rules are explained and set out in an FCA policy statement (PS25/4) and related Handbook instrument (FCA 2025/16), published on 9 May 2025. They came into force immediately, amending COBS 18, Annex 1 (Research and inducements for collective portfolio managers) and relevant provisions in COLL for authorised funds.

What do firms need to do now?

Fund managers that are subject to the UK AIFM or UCITS regimes will be affected by the policy change and must now decide whether and when to adopt the joint payment option for investment research.

For authorised funds, the new rules specify that adopting the joint payment option is a significant change, requiring fund managers to notify unitholders and obtain the FCA's approval through the usual process before this change takes effect.

Impact on the market?

Given the new rules do not require fund managers to adopt the joint payment option, what benefits might they expect from choosing to do so? The short press release accompanying PS25/4 indicates the FCA's view. It describes how, through the new rules, it has "extended [the] freedoms" previously granted to MiFID investment firms, and emphasises the growth aspects of its policy, namely increased efficiency, competitiveness and flexibility in the area of investment research. The FCA believes these benefits will accrue to fund managers (and the wider UK equity market).

There are a couple of specific factors that may encourage fund managers to take up the joint payment option:

• First, while fund managers can expect implementation costs, respondents to the FCA's consultation proposals anticipated that the costs from firms' own resources would in practice be "relatively low". This is on the basis that related costs have to some extent already been absorbed due to implementation of MiFID II-derived requirements and alignment with the rules for MiFID investment firms that have previously been amended to allow for the joint payment optionality.
• Second, in relation to authorised funds, the amendments to COLL categorise taking up the joint payment option as a significant change (requiring notification to unitholders) rather than a fundamental change (requiring unitholders' approval). Consultation respondents agreed with the FCA's approach and provided feedback that requiring unitholder approval would likely prevent fund managers from taking up the payment option.

With growth a priority, the FCA will no doubt hope that fund managers decide to adopt the investment research joint payment option and that it has a positive impact over time.

Background: MiFID II "unbundling" and the UK Investment Research Review recommendations

The background to the new rules is that MiFID II introduced unbundling requirements to separate firms' charges for the provision of execution and investment research services. This resulted in firms either paying for research from their own resources (known as the P&L model) or agreeing a separate research payment account with their clients (known as the RPA model).

The UK Government's Investment Research Review (IRR) (reported in July 2023) found that, while it was generally agreed that the decline in investment research coverage in the UK pre-dated the MiFID II unbundling requirements, these requirements had impacted adversely on the provision of investment research and had not achieved all the anticipated benefits. In particular, the IRR identified operational complexity around the regime, notably for firms purchasing research through the RPA model.

To address the key concerns of industry and to ensure the continued robustness and wide-ranging nature of the UK investment research market, the IRR's recommendations included introducing additional optionality in paying for investment research.

The first step: introducing joint payment optionality for MiFID investment firms

Acting on the IRR's recommendations, the FCA consulted on and implemented (with effect from 1 August 2024) new COBS rules providing MiFID investment firms with the option of using joint payments for research and execution services, provided they comply with certain guardrails.

In the policy statement (PS24/9) (July 2024) confirming these rules, the FCA noted that its policy intention was to make further changes ensuring consistency across its rules on research and inducements for investment firms and collective portfolio managers. To achieve this regulatory alignment, the FCA committed to making, at a future date, the same payment option available in substance to other asset managers.

The next step: introducing joint payment optionality for fund managers

In November 2024, the FCA set out in a consultation paper (CP24/21) its proposal to allow all fund managers subject to the UK AIFM regime and UCITS regime to purchase research using a joint payment option, subject to guardrails in line with those applying to MiFID investment firms, but adapted for funds.

The final rules in PS25/4 are broadly in the form in which they were consulted on in CP24/21. However, having considered the feedback received, the FCA made certain changes to the guardrails. In broad terms, it allowed greater flexibility by permitting fund managers to establish controls across their fund ranges rather than for each individual fund, except in relation to authorised funds' value assessment and disclosure requirements.

The guardrails will operate alongside existing FCA rules relating to assessment of value and not allowing undue costs to be charged to a fund. The FCA considers that this approach will provide an appropriate level of protection to fund investors.

The new rules also amend acceptable minor non-monetary benefits, in line with the rules the FCA previously introduced for MiFID investment firms.

The FCA has made clear that its rules on best execution continue to apply and that fund managers must not consider the provision of investment research to be a factor in achieving best execution for funds.

What benefits does the FCA consider will flow from the new rules?

In PS25/4, the FCA highlights three key points that it considers demonstrate how the new rules are pro-growth and will lead to benefits for fund managers:

• The new rules will help drive efficiency in UK markets because fund managers need high-quality, easily accessible investment research to make informed investment decisions for investors' benefit.
• The changes made will be especially beneficial to the competitiveness of smaller fund managers, fast-growing firms and new market entrants, by reducing the costs of procuring research and potentially increasing understanding of sectors, business models and product innovations.
• A joint payment option with similar features to those in other jurisdictions will reduce barriers and frictions for purchasing research cross-border where bundled payments are standard practice. This will boost fund managers' international competitiveness.

Additionally, in the FCA's view, improvements in the availability of information (i.e. through a greater volume and breadth of investment research) should benefit the functioning of the wider UK equity market. The FCA admits, however, that it is "less certain on the causal link between the existing payment options and the reduction in investment research availability."

What will success look like?

Whether the FCA will come to regard its policy in this area as a success will depend on various factors, including:

• The number of fund managers taking up the joint payment option.
• Seeing encouraging changes in trends in research production and use.
• Confirmation that fund managers' adoption of the joint payment option has not led to undue costs or consumer harm.

To measure success, the FCA may conduct a survey of fund managers "after a reasonable amount of time". More generally, it uses a range of metrics to assess whether its work and policy interventions are strengthening the UK's position in global wholesale markets.

The FCA acknowledges in PS25/4 that "[r]egulation is not necessarily the key driver for markets of investment research and asset management." Ultimately, if its intervention in this area does not achieve the intended effect, or has an unintended effect, in line with its Rule Review Framework, the FCA will consider whether to take further action.