The FCA's PS25/4: Extending Investment Research Payment Optionality to Fund Managers
min readIntroduction
On 9 May 2025, the UK's Financial Conduct Authority (FCA) published Policy Statement PS25/4, marking a significant step in the evolution of investment research payment structures. Building upon the foundations laid by PS24/9, this latest policy statement changes the way in which UK fund managers may pay for investment research and extends the option for joint payments for investment research and execution services to fund managers, including those managing UCITS and Alternative Investment Funds (AIFs). This move aims to enhance flexibility, promote competition, and address the challenges posed by the unbundling requirements introduced under MiFID II.
The changes are in response to the 2023 UK Investment Research Review, which identified that MiFID II’s unbundling of research and execution costs had reduced research availability and created operational burdens, especially for smaller fund managers. Previously, the FCA issued CP24/7 and PS 24/9, in which it consulted on and implemented Rules to introduce a joint payment option for MiFID firms. These Rules extend this joint payment option to UK regulated fund managers.
Background: From MiFID II to PS25/4
The MiFID II directive, implemented in 2018, mandated the separation of payments for research and execution services to enhance transparency and manage conflicts of interest. However, this unbundling led to operational complexities and a decline in research coverage, particularly for small and mid-cap companies.
In response, the UK government commissioned the Investment Research Review (IRR) in 2023, which recommended reintroducing flexibility in payment structures. The FCA's PS24/9, published in July 2024, introduced a joint payment option for MiFID investment firms. PS25/4 now extends this option to fund managers, aligning the regulatory framework across different types of investment firms.
Who Is Affected?
PS25/4 primarily impacts the following.
- UCITS management companies;
- Full-scope AIFMs;
- Small authorised AIFMs; and
- Residual collective investment scheme operators.
These entities, previously excluded from the joint payment option introduced in PS24/9, are now brought into scope, allowing them to adopt a more streamlined approach to paying for investment research.
Key Features of the Joint Payment Option
Under PS25/4, fund managers can opt to make joint payments for third-party research and execution services, provided they adhere to specific requirements, as follows.
Written Policy
Establish a formal policy outlining the firm's approach to joint payments, including governance, decision-making processes, and controls to ensure research costs are maintained separately from execution costs.
Research Agreements
Enter into agreements with research providers that detail the methodology for calculating and separately identifying research costs within total charges.
Payment Allocation Structure
Implement a structure for allocating payments among research providers, promoting fairness and competition.
Operational Procedures
Develop procedures for administering accounts used to purchase research, including timely reconciliation and regular reporting.
Research Budgets
Set annual research budgets for each fund based on expected needs, independent of trade volumes, to avoid cross-subsidisation between funds.
Periodic Assessment
Assess the value and quality of research periodically, incorporating this into the broader assessment of value under the Collective Investment Schemes Sourcebook (COLL).
Cost Allocation
Ensure fair allocation of research costs among funds, considering the benefits received by each.
Disclosure
Provide appropriate disclosures in fund documents, including the prospectus and annual reports, detailing the approach to joint payments and any changes to research budgets.
Practical Considerations for Fund Managers
Adopting the joint payment option requires careful planning and implementation, with a number of practical consideration for fund managers.
Governance and Compliance
Establish robust governance structures to manage joint payments and ensure compliance with the FCA's requirements.
Client Communication
Communicate transparently with investors about the new payment structures and any potential impacts on fees.
System and Process Updates
Update internal systems and processes to handle budgeting, payment allocations, and reporting.
Training and Education
Train staff on the new policies and procedures to ensure consistent application and understanding.
Disclosure Requirements
Review and update disclosure documents, such as the Key Investor Information Document (KIID), to reflect changes in payment structures.
Next Steps
Fund managers intending to adopt the joint payment option should consider the following.
Review and Update Policies
Develop or revise policies to align with the FCA's requirements.
Engage with Research Providers
Negotiate and formalize agreements detailing cost calculations and service expectations.
Communicate with Clients
Inform clients about the changes, providing clear explanations and addressing any concerns.
Monitor and Evaluate
Regularly assess the effectiveness of the new payment structures and make adjustments as needed.
The FCA plans to monitor the uptake of the joint payment option and may conduct follow-up supervisory work to assess its impact. Firms should stay informed about any further guidance or rule changes that may arise.
Conclusion
The Rules came into force immediately on 9 May 2025, allowing fund managers the freedom to adopt the new payment option from now on. The FCA's PS25/4 policy statement represents a significant shift in the regulatory landscape for fund managers, offering greater flexibility in how they pay for investment research. By carefully implementing the joint payment option and adhering to the outlined requirements, firms can enhance their research capabilities while maintaining compliance and transparency with clients. However, given the strict requirements for using the options, many fund managers may not take up the opportunity.
