Simmons client note on the FCA amendments to the MiFID2 research rules

What’s new?

On 10 April 2024, the FCA published a consultation paper (CP24/7) on Payment Optionality for Investment Research. The FCA proposes that UK firms should be permitted to pay for research using bundled payments, as a new third option alongside the existing RPA and P&L models.

Simmons & Simmons Client Note

Our client note, “Back to the (bundled research) future: FCA proposals for amendments to the MiFID2 research payment rules”, provides a summary of the following top 10 things that firms need to know about the FCA consultation paper:

• What is the current situation?
• What’s the context to the FCA’s consultation?
• What does the FCA propose?
• What are the guardrails for using the bundled payment model?
• Which firms will be affected by these changes?
• Are there other changes proposed?
• What will be the options for receiving research, if this is adopted?
• What’s the timing?
• What should we do, if we want to use the bundled payment model?
• What does Simmons & Simmons think?

Background to the FCA Consultation

The MiFID2 research unbundling requirements were widely criticised in the market, as they are complex to operate and may penalise smaller firms which are less able to afford third party research.

The unbundling requirements also impede the ability of UK firms to obtain research from US broker-dealers (which are not permitted to receive hard dollar payments for research, following the expiry in July 2023 of the SEC no-action letter, which had permitted such hard dollar payments for a transitional period after MiFID2 came into force).

Consequently, the UK government undertook to review the rules as part of the Edinburgh Reforms. July 2023’s UK Investment Research Report recommended (amongst other things) that UK asset managers should be permitted to pay for research on a bundled basis.

The purpose of the FCA’s consultation is to give effect to that specific recommendation, by proposing amendments to the FCA inducements rules and research payment rules, to allow the receipt of bundled research and commission sharing arrangements.