The tone of the Call for Evidence indicates the controversial research unbundling rules could be primed for reform.

On 3 April 2023, HM Treasury published a Call for Evidence as the first step in the independent review of investment research and its contribution to the competitiveness of the UK’s capital markets.

The review has the stated key objectives of:

• Assessing the link between levels of research and the attractiveness of the UK as a destination to list
• Evaluating options to improve the UK market for investment research and to provide recommendations to this effect

The review was announced as part of the Edinburgh Reforms in December 2022. The Chancellor noted at the time that “the review is part of the government’s wider commitment to enhance the UK’s ability to attract companies to list and grow”.

The Call for Evidence seeks views on 12 questions that are generally quite broadly framed and act as an information-gathering exercise — similar to what we have seen recently with the SMCR Call for Evidence and the Short Selling Call for Evidence.

In seeking to better understand the investment research landscape, the Call for Evidence questions cover (amongst other things):

• How investment research provisions in the UK compare or are perceived to compare internationally
• How important investment research is to the attractiveness of the UK public markets to listed companies and their investors
• What steps (legislative and non-legislative) could be taken to improve the provision and quality of research on UK listed and quoted companies
• What impact the current UK legislative and regulatory environment have on the provision and quality of research including (but not limited to) the MiFID II unbundling rules

This last question (and the other closely related questions) suggests there may be appetite to revisit the rules on unbundling. Current unbundling rules require that firms providing both execution and research services price and supply those services separately and also ensure that the supply of, and charges for, other benefits or services are not influenced or conditioned by the levels of payment for execution services.

How investment research should be paid for is a long-standing complicated and controversial issue. At the time of implementation, the FCA concluded that unbundling research from dealing commissions would be the most effective way to address the potential conflicts of interest in which investment managers use transaction costs to fund external research. However, the unbundling rules have been criticised since inception as impacting the competitiveness of the European research market. Stakeholders have expressed concerns about both the quality and quantity of the investment research produced in Europe compared to other jurisdictions, such as the United States where unbundling is not required, along with previous amendments to the rule in the UK and EU.

Interestingly, in a speech on 29 March 2023 to the Global Investment Management Summit on reform of the capital markets ecosystem, FCA Chief Executive Nikhil Rathi remarked that “regulation is only part of the answer” and that “real change requires both financial and an ongoing sustained commitment from all parts of the ecosystem, infrastructure that controls exchanges, trading, clearing, settlement, corporate advice, buyside and research (emphasis added)”.

Taking all of these developments into account, and in an environment in which the government appears focused on making UK markets as attractive as possible, it would not be surprising if there are moves to reconsider the rules on unbundling.

Meanwhile, in the US, the SEC’s no-action relief is due to expire on 3 July 2023. Currently, US broker-dealers can rely on this relief to ensure they do not face additional regulation for accepting separate payments for research from UK asset managers (Please see Latham’s Client Alert for more information on this topic). However, even if the unbundling rules change in the UK following conclusion of the investment research review, they would not take effect in time to pre-empt the loss of the no-action relief. What happens after 3 July 2023 remains to be seen and it will be interesting to see to what extent the US and the UK will interact to ensure a workable solution for firms on both sides of the Atlantic.

The review is due to run until June 2023. A set of recommendations will then be presented to the City Minister. The Call for Evidence is open until 24 April 2023.