No one can claim any surprise at FCA’s consultation draft of its rules on Inducements and Research (CP 16/29). The policy has been chewed over for years and now it is down to the detail. We are within spitting distance of the final rules, albeit that it may be nine months before we lay a finger on them. Although just one of many issues covered in the MiFID II Consultation Papers, Inducements and Research is the one that attacks the business model of many investment firms.

It is also no surprise that the measures are to be applied, not only to MiFID firms, but also to UCITS management companies and AIFMs, both large and small.

There is a major decision for firms to make that will involve Board-level strategy. Will you set up Research Payment Accounts or will you pay for the research yourself?

No firm in its right mind would consider the RPA if the cost of research was expected to be insignificant. But for most, ‘insignificant’ will not be the word. As the FCA puts it succinctly, “a firm providing both execution and research services must price and supply them separately.” (COBS 2.3C.3R) That is pretty clear and research analysts do not come cheap.

Groan as you may, the two dozen rules are almost all about the duties, controls and restrictions to be applied to RPAs. These accounts will not be cheap to run by the time you have determined your policy, worked out your budget, agreed your charges with every client, structured your management oversight, designed your disclosure documentation, and appointed a third party or two to help with the dreary bits. RPAs are not destined to win hearts and minds. The question is: can you afford not to use them?

One of the more striking aspects about the alternative, the pay-for-it-yourself option, is how little is said on the subject. The FCA offers a one-liner: “direct payments by the firm out of its own resources” (COBS 2.3B.3R(1)). The message is clear, but the scope may be a little less so. The regulator makes no attempt to restrict the usage of this approach. ‘Own resources’, not defined, simply means the assets of the firm. So, digging into own resources means digging into own profits ,,,,,,,, or does it?

Let’s be clear, regulation does not prevent the recovery of costs through charges to clients. What inhibits increased fees and additional charges is competition. So part of the question is: what will the competition do? Each firm has a choice, but it is not the binary choice set out in COBS. The firm can deploy the RPA and levy its clients with the associated charge. Or it can pay out of its own resources and accept the loss of profit. Alternatively, it can raise its fees or apply a charge to compensate itself, in whole or part, for the cost that it is taking away from clients. It must be near certain that in a large industry, such as we have in this country, we will see examples of each of those options emerge. But how will the informed client react?

With the firm that accepts the loss of profit, the client will see himself paying less as a result of brokers’ commissions being reduced to cover only the cost of execution. But will he entirely trust the firm to acquire all the research that it needs?

With the RPA-minded firm, he will admire their diligence in the ample disclosure that they provide, or he may tire fast of the flood of data that he has never asked or wished to receive or pay for. Meanwhile, the firm will experience significant cost in providing the data and other RPA baggage, either reducing profit or necessitating some increase in fees, in addition to the research charge, for an unsought service.

With the alternative-minded, the client will be invited to accept that what he gains on the commission swings, he loses on the fees roundabouts. He will still pay for research, as he always has, but he will pay through fees to the firm. However, as this is going through the firm’s P&L, he will not be paying for RPA admin. And what of trust? The enlightened firm will offer bespoke transparency. In place of the mandatory disclosure and structure conceived by eurocrats, the firm will provide, to those who welcome it, a simple report, accounting for its research expenditure and justifying its additional fee.

All of this begs one last question: what will Brexit do to these requirements? Forecasting Brexit may be a mug’s game, but it is one that we are forced to play. Many take the view, not unreasonably, that, post-Brexit, FCA will be paralysed by a concern to retain equivalence. While that seems probable, equivalence is not the same as congruence and however determined the regulator and industry may be to maintain equivalence, it should not prevent fine-tuning of requirements to deliver consistent outcomes by more efficient means. The RPA regime might be a popular candidate for such treatment, holding out the possibility that, sometime in 2020, a couple of years after implementation of MiFID II, RPAs might become a little more user-friendly. Were that to be so, they might almost become popular with managers and clients alike. It is equally possible that around that time a review of the working of MiFID II might scrutinise the means by which firms have funded the payment for research out of own resources, possibly resulting in a reduction of the scope and attractiveness of that option. If all that is right, it looks like a further reason for avoiding RPAs at this stage.

Anyway, whatever Brexit may bring in the next decade, in 15 months from now, firms must have all this in place. Which way will you go?