1. Background: Why the Change?

The shift towards “bundled” payments—where fund assets cover both research and execution services—comes in response to the evolving nature of investment management. Under the current rules, fund managers must often separate research costs from execution services, which can create administrative challenges and make it harder to access certain research sources, especially from US-based broker-dealers who may not accept unbundled payments.

To address these challenges, the UK Financial Conduct Authority (FCA) and the EU MiFID II regulations are moving closer to allowing fund managers more flexibility with payment models.

2. What’s Happening in the UK?

In the UK, the FCA is proposing to give fund managers an option to use fund assets for joint payments—a method that combines execution and research costs in one bundled payment. While this option isn’t mandatory, it presents an appealing way for firms to simplify payment structures, particularly when dealing with US broker-dealers who cannot accept separate payments for research.

However, there are some important guardrails attached to this new option:

• Fund managers would need to disclose to clients how funds are being spent.
• The FCA would require managers to demonstrate that their research spend is delivering value for money for each fund client.
• If a fund manager opts for joint payments, it will be considered a significant change, requiring prior FCA approval and 60-day notice to unitholders.

3. The European Union’s Approach

Across the Channel, the European Union is aligning its regulations with the UK’s proposed changes, though there are differences in the implementation timeline and conditions.

Under the MiFID II amendments proposed in the Listing Act Directive, EU member states must implement new rules by June 2026. These changes will allow investment firms, including separate account managers, to bundle execution and research payments.

Key differences in the EU proposal:

• Expanded Scope: The current restriction that excludes research on companies with a market capitalization over €1 billion will be removed.
• Firms will be required to assess the quality, usability, and value of research they acquire to ensure it contributes to the fund’s performance and objectives.

4. Why Does This Matter to Fund Managers?

The changes are not just a technical shift; they could reshape how research is sourced and used by fund managers. The key benefits of adopting bundled payments include:

• Access to a wider range of research, particularly from US broker-dealers.
• Simplified accounting and fewer administrative burdens associated with maintaining separate research payment accounts.
• Greater flexibility in how funds manage their research budgets and allocate capital.

However, these benefits come with the responsibility of maintaining transparency and ensuring compliance with both UK and EU regulations. Fund managers will need to:

• Adjust their client communications to reflect changes in research payment structures.
• Be prepared to provide value assessments for the research they purchase.
• Stay updated on the approval process for any significant changes to fund payment structures.

5. Looking Ahead: What’s Next?

The rules proposed by the FCA and the EU are not yet final. The FCA plans to finalize the UK rules in the first half of 2025, while the EU’s changes will be rolled out by June 2026. In the meantime, fund managers should:

• Stay informed about the ongoing rule developments in both regions.
• Evaluate their current research payment models and how they may need to adapt.
• Begin preparing the necessary disclosures and procedures to ensure smooth implementation if they choose to adopt bundled payments.

Conclusion

The UK and EU are paving the way for a more streamlined approach to research payments in investment management. Fund managers should stay ahead of these changes, ensuring they can take advantage of the flexibility offered while meeting the regulatory requirements. By embracing these proposed rules, firms can enhance their access to critical research and improve overall fund performance, all while maintaining transparency and accountability to clients.

For further details on these regulatory updates, feel free to reach out to us, or visit the full article by Philip J. Morgan and Andrew J. Massey of K&L Gates LLP on Global Investment Law at The National Law Review.