This guest article was written by Chris Newson & Caroline Bayman. Chris and Caroline together have over 45 years’ experience in research and commission management on buy and sell sides. They have led client strategy teams at Credit Suisse, BAML and Citi and managed investment research for Fidelity and Janus Henderson. Currently they are providing CSA consultation to Rothschild & Co Redburn and their clients.
The UK market has an opportunity to address some of the competitive disadvantages created by the unintended consequences of MiFID II. Credit to the Treasury and FCA for recognizing the need to increase research on UK markets. Implementing CSAs should be a breath of fresh air for managers and investors alike as the shackles are removed but there is reticence and take up has been slower than expected, so let’s examine some of the concerns we have heard.
“Our investors will not accept taking on the cost of research because the benefit to them is unclear”
Everyone reading this will be an investor through their pension fund and if they are lucky, through investing savings. Do you ever look at the costs when choosing investments or when a pension fund manager chooses funds for you? Thought not. Most agree that moving to client funded research will not materially increase costs to clients, particularly when offset against potential performance improvement. In 2018, MiFID II tilted the playing field with US fund managers charging research to clients while UK fund managers took research costs onto their own books. Was there a mass migration of clients from US fund managers to UK ones? No, because cost is not the major consideration in choosing a fund manager. It is all about performance.
Managers are also concerned the messaging to pension funds and other investors by the policymakers to prepare the ground has not been clear. More is needed from the FCA, TPR and trade bodies such as NAPF to emphasize the benefits to investors. It only takes one client refusal to give a Manager additional concerns about treating clients fairly and cross subsidizing.
“Communicating this change, however concisely, could open up a wider conversation on fees”
We understand why fund managers are reluctant to talk to investors about cost, especially if performance is poor. However, the rule change offers an opportunity to discuss how the root cause of poor performance could be the stifling effect of MiFID II rules on the research market. This change should reinvigorate UK capital markets to the benefit of all.
“The FCA will not be happy if the move to joint payments is accompanied by an increase in research spend”
Let’s consider that for a moment. The regulator now allows research to be paid via CSAs, moving costs from fund managers to investors. If this happens in isolation it implies the reversal was simply designed to make fund managers more profitable, whereas the FCA’s primary concern however is to protect and benefit the end investor. Therefore, the revision to the rules allowing CSAs must be the catalyst for change, not the change itself, otherwise it makes no sense. The real shift must be to encourage increased research consumption, allowing greater flexibility to meet research needs.
“Our portfolio managers get all the research they need anyway”
Really? In our professional careers we have met very few portfolio managers who thought they received enough quality research. It is possible they have stopped asking for more because they see it as an exercise in futility knowing the finance department will just say “no”.
Since 2021, the percentage of UK active fund managers beating their benchmark has dropped from 41% to 29%1. Admittedly many factors go into an investment decision, so it isn’t necessarily proof that the reduced consumption of research has caused the decline in performance, but like all good TV detectives, we are not fans of coincidences. If portfolio managers get all the research they need and less than 30% beat the benchmark, that doesn’t reflect well on the quality of portfolio managers.
Post-MiFID II, research became a fixed cost to managers, alongside other operating costs, resulting in a significant drop in spend. Medium sized US Asset Managers on average now spend 30% more than UK counterparts2. The detrimental impact on UK capital markets is clear. Research must be treated as a variable cost. Client funding allows research budgets to be flexed so fund managers can react to market conditions, are free to explore innovative tools and new arenas to generate alpha.
“The rule change doesn’t address Corporate Access”
Difficult to circumnavigate this because it is true and continues to be the primary area of misalignment with the US. It is a bugbear for the UK Capital Markets, creating a structural disadvantage for UK managers struggling to access corporates. Why would a broker take a company to see UK fund managers and be paid a concierge fee in the (£)hundreds when a US fund manager will pay research fees of ($)thousands?
Corporate Access is an important value add service for investors in which brokers play a key role; potentially one the regulator has underestimated. This role should command an appropriate payment which should be payable via commissions.
Conclusion
For smaller and mid-sized managers, the instant benefit of removing the research budget from their P&L is clear and a strong motivator for change, but it is not just about saving money and getting the CFO out of the Investment Department’s way (although that is a major benefit). It is about having the flexibility to increase research spend to identify opportunities which should lead to improved performance.
Many fund managers have undertaken projects this year to prepare for this change, however as they lift the bonnet they are discovering further operational complexities adding to the delay, e.g. in fund prospectus or IMA updates. There is also an inherent 4+ months delay taking account of FCA approval and client notice periods.
The conversations we have had over the last six months demonstrate the majority of firms want to adopt CSAs. However, they are reluctant to move unless in a wave to mitigate risk of negative investor and media reaction. Many “globals” now have business models so weighted towards passive management and the US market that potentially the P&L benefit is not as material as for small or mid-tier clients. Globals are more focused on operational efficiencies of adopting CSAs, i.e. greater alignment to the US – this means widening the definition of research to include Corporate Access (and AI tools) – currently in discussion but not as yet accepted by the FCA. So round and round we go.
While this game of blink maybe frustrating, investor reaction concern continues to drive the inertia. It is difficult for Managers to justify a change where the additional cost is immediate but the benefits have a longer Ɵme horizon. The optionality is designed to allow all fund managers to move forward as best suits them and their clients, not to worry about their competitors. Whilst we are seeing Managers taking steps towards this, more is needed from policymakers and trade bodies to support them and convince investors this change is to everyone’s benefit. Discussions on 2026 research budgets will be underway and the longer the industry delays the greater the missed opportunity.
If you would like to discuss adopting CSAs please contact us at caroline.bayman@fgaconsult.co.uk.
1. AJ Bell: Man versus Machine report data: In 2021 41% UK active funds beating passive alternative, by 1H25 this had dropped to 29%, 10yr average of 31%
2. Substantive Research Survey Sept 2025