- Substantive Research surveys global asset managers on FCA unbundling rules, published in July 2024
- Survey shows that the market is split between a core of potential early adopters, a large “wait and see” group and an entrenched group of sceptics
London, 22 August: Substantive Research, the research and market data discovery and spend analytics provider, published the findings of its latest global asset management survey today, evaluating the industry's reaction to the FCA’s unbundling rules, which came into force on 1st August 2024.
For context, after the FCA published its Consultation Paper on “Payment Optionality for Investment Research” (CP 24/7) in April 2024, the industry came back to the FCA with very clear concerns and requests, and the final Policy Statement (24/9) shows that the regulators have listened.
The aim of the Substantive Research survey was to gauge asset managers’ reaction to the final rules and to see whether the FCA’s changes to their initial proposals will change the industry response. Key findings compare how the buy side feels now with the final rules in place, versus the reaction to the Consultation Paper in April.
Overall, the survey confirms that the changes the FCA has made between the Consultation Paper and the final rules have eliminated some deal breakers for the more engaged firms keen to proceed. The FCA has removed key operational barriers that were hampering the potential take-up of greater flexibility in research funding, and there is a group of asset managers gearing up to test market reaction, save money and potentially increase their access to research inputs. But an equal number of buy side sceptics point to a scenario where asset owners scupper any real momentum shifts.
- The group of managers who are “Neutral and waiting to see how the rest of the market moves” has grown slightly to 45% of respondents, up from 42%.
- The potential early-adopter group who are “Broadly interested but not a first mover” has doubled to 18.2%, up from 9.1%.
- Accordingly, the proportion of those “interested but put off by the detail of the FCA guardrails” (on budgeting, disclosure, cost allocation and valuation) has shrunk by 9%, down to 9.1%.
However, more than a quarter of firms do not intend to move budgets and are sceptical that this will gain traction with peers:
- 18.2% position themselves as “Sceptical and not engaged” and
- 9.1% are “Not interested in moving.”
Many of these firms don’t think these changes would spur further coverage on UK SMEs, and regard the unbundling rollback as an unwelcome distraction, now that they finally have their post-MiFID II processes in place and working well.
Mike Carrodus, CEO of Substantive Research, said: “The changes in asset managers’ attitudes are driven by changes in the FCA’s final rules when compared to the initial consultation. It’s clear that the biggest sticking point was the impression that the Consultation Paper was mandating strategy-level research budgets. This is something that many firms are loath to do, as they share research across the firm and would find allocating that spend at a granular level problematic.”
Our survey shows that:
- 60% of respondents cited “Relaxation of the rules around strategy level budgets” as the most important change, followed by
- 18.2% said the most important change was “Removing the requirement for buy side firms to have separate written agreements with providers.”
Carrodus added: “We are now faced with two sets of firms with completely opposing views, both representing approximately a fifth of the market, and nearly half of the buy side on a ‘wait and see’ mode.”
The market is also split when it comes to expectations on how fast the new rules will be adopted:
- The group of firms that expect no change within 2 years has grown by 7%, up to 42.4%.
- In contrast, within the same 2 year timeframe, 15.2% think that the majority of research budgets will be client-funded, with a significant 42.4% expecting that there will be a “broadly equal mix of client-funded and P&L” budgets by then.
Carrodus concluded: “The source of this uncertainty is the conversation with the end investor. The FCA has clarified that it only needs asset owners to be informed of the new policies and changes if asset managers do move to “joint payments”, so explicit consent is not required. However, many senior executives on the buy side do not want to open up the fees discussion during such a challenging time for asset gathering and retention.
“As these are new costs being reintroduced after 6 years of asset managers paying for them out of their own pockets, they anticipate pushback from clients and do not want to have to try and figure out what to do if a handful of clients object and opt out of paying while the rest acquiesce.
“Brokers and independent research providers may target a more lucrative future after years of price deflation, but we’ll only know if those hopes are well founded when the first canaries venture down the coalmine this winter!”
Universe of respondents:
33 of the largest asset managers surveyed
Total AUM: > $11 Trillion
Geographic split by headquarters: 36% N. America, 12% EU, 52% UK
Strategy: Long Only 79%, Hedge Fund 12%, Wealth Manager 9%
About Substantive Research
Substantive Research provides independent comparison and discovery on investment research, ESG and market data pricing and products, to financial institutions that represent a combined AUM of more than $18 trillion and total assets of over $25 trillion.
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