May 22, 2025.  Please note that this is an automated transcript of the above mentioned podcast; errors may exist. If you have any questions, please contact Castine.

Robin Hodgkins: Hello and welcome to this episode of Castine Conversations. My name is Robin Hodgkins and I’m the president of Castine. In these episodes, we meet the business leaders and businesses involved in commission management, research, compensation, and compliance as they’re used in both the investment manager and broker space worldwide.

My conversation today is with John McGough, a business development advisor for Castine who has almost 30 years of experience in the CSA world. John’s experience goes back to the days of soft dollars in America, and he has been central in discussions around CSAs, CCAs, MiFID II, and now the whole rebundling as it is happening now in England.

We’ll be talking about some of the latest developments in the regulatory environment in England and how they’re affecting asset managers and brokers in England and also globally. I hope you enjoy the conversation.

Great. So John, thank you very much for joining me today for this conversation.

John McGough: My pleasure, Robin.

Robin Hodgkins: So you and I have worked together for quite a while and we’ve seen a lot of change happening in the CSA space, even before it was called the CSA space. But now I think the real focus of attention is in the markets in the United Kingdom with the changes that have been happening since really 2018 and most recently, all the changes that Rachel Kent and all of the wonderful people at the FCA have brought out.

So I wanted to talk to you today about some of the latest developments, how they’re going to affect firms small and large in the United Kingdom. But I also think it would probably be good to start back a little bit, you know, back in the more recent past to understand how we got here. So most recently, a lot of people think about the whole commission management space with the advent of MiFID II that was really supposed to be introduced in 2018.

So maybe we can do a bit of time travel back to 2018 and talk about what the intent was back then with what the FCA was trying to do.

John McGough: Sure. You know, that’s a great place to start, Robin. So believe it or not, this really started in 1986 when Prime Minister Margaret Thatcher eliminated fixed commissions on securities trading. That was really designed to help the UK better compete globally with the rest of the world.

But soon after that, the UK introduced CSA commission sharing, which allowed the managers to use client commissions to fund investment research. The use of CSA continued until 2018 when MiFID II became law in the EU, and that gave managers three choices on how they could fund research.

One, from their own resources or P&L, profit and loss. Two, they could use an RPA, which is short for research payment account, which came with a lot of regulatory complexities. So it wasn’t a very popular option with most managers. Or three, a combination of the two.

So in 2023, the UK had the investment research review, which came out with some very interesting recommendations. And the one that was focused on was providing greater flexibility in how managers could fund investment research. So this resulted in PS 24/9, which introduced joint payment optionality or the use of CSA for MiFID investment firms. And then following that immediately was PS 25/4, which extended this option to fund managers.

Robin Hodgkins: That’s great. So we’ll be getting into both of the policy statements, PS 24/9 and PS 25/4. But you bring up a number of really important points. First off, when MiFID II came out, it was something that was really kind of pan-European because there was a pan-European area back then.

It affected the United Kingdom. It affected Europe, the rest of Europe as well. And now with Brexit, there’s been a splitting of what’s happening on the continent and what’s happening in England. So England is now pretty much on its own to do what it needs to do. But in your mind, what were the precipitators that led up to the review in 2023?

Because from a lot of conversation we’ve had with clients, MiFID II had some great ideas built into it, but the realization and how it impacted the marketplace was quite significant. So maybe we can talk about that a bit before we get into the details of some of the most recent policy statements.

John McGough: Sure. I think the best way to start on that one would be that MiFID II mandated the separation of research and execution, right? So there were really good reasons behind it. They wanted to foster more transparency in the rules. They wanted to reduce conflicts of interest in the rules.

But unfortunately what happened was it led to a decline in research coverage and creation because the banks and many of the independent providers cut back on the availability of the research, being that there weren’t as many funds available to procure the research. So the impact of this really was felt mostly by the smaller companies, the small to mid-cap companies, because there was less research being made available for them.

Now, if you think about it, the small and mid-tier companies rely on research to attract interest in investments in their companies. So when that gets cut off or reduced, it impacts their ability to attract the money and the assets they need to grow their businesses. So as a result, enough time went by after MiFID II came into effect of this activity that led many UK domiciled companies to delist from the London Stock Exchange in favor of New York, Dublin, or Paris.

So that was kind of the straw that broke the camel’s back in the eyes of the Treasury and then the FCA. So that’s what led to the investment research review and the changes that are incorporated in PS 24/9 and 25/4.

Robin Hodgkins: I think that’s great. And I think it’s also a credit to the regulators, to the Chancellor of the Exchequer, Rachel Reeves, and all the rest of the team at the FCA that they looked at this and they said this is a problem and they needed to address this.

So I think that brings us to the consultation paper and the policy statement that came out of the initial discussion, which is formally known as PS 24/9. Can you talk a bit about how PS 24/9 looked to solve some of those problems in a systemic manner?

John McGough: Sure. I think it looked to solve the problems by simply allowing the joint payments for research and execution to happen, right? The use of client commissions to fund research. Which really aligns the UK rules with global practices, right? So if the rest of the world is doing it now, they’re no longer at a competitive disadvantage.

So in turn, this also improved their competitiveness by making the UK capital markets a more attractive destination for international investments.

Robin Hodgkins: Right. So there’s much more parity between what the SEC has created with the rules over here and the same set of options now for the UK, and we’ll talk about some of the differences later on. So most of the differences are kind of around the edge, not substantive differences in the actual meat of the policy statement. But the idea for global firms to be able to have much more of a general framework that they can use across the world appears to be something that was a major goal in what the FCA was trying to accomplish. Correct?

John McGough: Yeah, and you know, if you look at it also from the manager’s perspective, they would much rather operate under a single set of compliance rules and regulatory rules versus having to operate under multiple sets of rules, right? It’s easier for the manager to manage, less risky for them to manage as well, because there are fewer chances of things going wrong because you’re looking at different sets of rules. So that was a huge benefit as well.

Robin Hodgkins: Now, if you’re a UK-based firm, do you have to jump over to what is called payment optionality or to CSAs? Do you have to adopt CSAs or are there still different ways you can pay for research?

John McGough: Sure, there’s definitely—that’s why they call it optionality, right? So that gives the managers the ability to kind of continue along the way they’re going today. If they’re comfortable using client commissions, they can do so. If they’re comfortable using their own resources and paying for it from their P&L, they’re absolutely welcome to do that. And if they’re also comfortable with using the RPA, the research payment account approach, because they’re comfortable with complying with all the regulations and rules around that, they can continue to do that as well. So it’s just nice now to know that they have the additional optionality to make the choice to do it.

Robin Hodgkins: Great. And we think that a lot of firms will look at the use of client commissions to pay for research as a major benefit. We’ve had conversations with some people that say, well, is there an issue if I’m using client commissions where I’m going to start paying for more research, different research covering different areas, a wider mosaic of research? And I look at that and I say, well, that’s not really an issue because the whole purpose behind the FCA is to encourage more research across a larger landscape. Does that resonate with you as well?

John McGough: Yeah, no, absolutely. You know, don’t forget that there are additional requirements that are behind the scenes that need to be adhered to in terms of valuation of the research and budgeting and disclosures and making sure that what’s being paid for is reasonable in relation to benefits that are being derived from the research. So if the budget is increased because now you have the ability to use the client commissions, as long as the justification is there and all the boxes are being checked from a regulatory perspective to keep everything in line with the rules, then it’s mission accomplished.

Robin Hodgkins: Excellent. So that brings us to the guardrails or the safeguards that are built into PS 24/9. Can you talk a little bit about how those safeguards are helping to ensure transparency in research payments?

John McGough: Sure. So the very first thing that a manager needs to focus on is making sure that they have a written policy in place for their research and how they plan to pay for it. They need to establish research budgets. They need to have valuation processes in place to assess the cost of the research that they’re consuming and also have reasonable disclosure practices in place to ensure that investors know what they’re doing. So then periodically, the firms need to also continue to price and value the research on an ongoing basis to ensure that the costs are fair and so they can allocate the cost back to the funds properly.

Robin Hodgkins: Perfect. Great. So we’ve been talking about PS 24/9. And more recently there’s been a new policy statement that’s come out, PS 25/4, that kind of augments some areas of this. And I think there were certain firms that were kind of sitting on the sideline looking for clarification and looking for confidence to make sure that moving back into client commissions was the right direction. And I think there were a few areas where it was unclear whether that was going to be allowed. So it looks like PS 25/4 addresses some of those.

John McGough: Yeah. So when PS 24/9 came out in, I think it was August of last year, it provided a lot of clarity around the rules. So it provided the rules associated with using client commissions to pay for research. And because the FCA—I think they got it right. They really balanced the flexibility of being able to use client commissions with accountability, and that addressed concerns about research availability and also kept the protections for investors in place.

So another big benefit that we discussed a little earlier was around how the rules now align with global standards, making the UK market a more competitive place to do business. PS 25/4 takes that and expands it into other areas where there were concerns, such as UCITs and AIFs. So maybe talk a bit about how that’s helped calm some nerves in the marketplace.

Yeah, so what the FCA did with PS 25/4 was to just expand the research payment framework that they created in PS 24/9 and extended the optionality to use client commissions to fund managers, including UCITs and alternative investment funds. And what they accomplished with that is ensuring a consistent approach across investment firms and addressing the operational inefficiencies that were associated with the unbundling rules of MiFID II.

Robin Hodgkins: So a firm that operates in multiple areas that might have been hesitant to reengage, they now have PS 25/4 to say, “Hey, look, this does work with UCITs, with alternatives.” And it’s really, I believe, a move from the FCA to say, “Hey, we really want you to use client commissions. We want you to have better research. We want you to have better performance.” Right?

John McGough: Right. And it just welcomes the UCITs and the alternative investment funds into the fray and gives them the optionality as well. So they’re really trying to do their best to affect the changes that these new rules are designed to affect, and that is to improve the capital markets business in the UK, to make the research—to promote the creation and availability of small and mid-cap research to again promote investments in those companies in the UK and strengthen their overall capital markets.

Robin Hodgkins: Definitely. And it makes it more of a global solution for firms in the UK and elsewhere. But there are still a few areas that differ. We can talk a bit about the SEC. My take on the SEC is smooth waters, nice air, nice wind. Let’s just sail ahead. No change, of course. So I’m not expecting any changes anytime soon from the SEC. But there are things from the FCA point of view that are different from some of the rules we see in the states. Can you talk a bit about some of the two primary differences or the few primary differences that still exist under the new policy statements and what the SEC is allowing with 28(e)?

John McGough: Thanks, Robin. Yeah, so there are three major differences between the FCA’s rules and the SEC’s as it pertains to using client commissions to pay for or fund research. In the US, managers are permitted to use client commissions to pay for corporate access, and they’re also permitted to use client commissions to pay for market data. Both of those two are not eligible in the UK because the FCA has a different view on the eligibility of it from an investment perspective, and they disallow the use of client commissions.

So the other major difference is in the US, managers cannot get research credit on any trading that occurs on a principal basis. But in the UK, you can. The SEC has the perspective that when a manager trades with a broker on a principal basis, it’s very likely that that transaction is going to be occurring out of a broker’s inventory. And when that happens, they are less confident in the best execution that best execution is actually being attained, versus an agency transaction where it’s out in the open market and you can clearly see when you’re getting better best execution or not. So those are the three main differences that exist between the two.

Robin Hodgkins: Excellent. Thank you. And it’s also fascinating to hear about the whole best execution aspect of principal trading in the US, so it’s a very different view of the world. Speaking of corporate access, I want to talk about a couple things that might change in the future. Do you see other regulatory shifts in the treatment of investment research payments along the lines of corporate access? I mean, there’s been discussion at some of the conferences and some of the private groups about the possible allowance for corporate access. So maybe you can talk a bit about that. We don’t have a crystal ball exactly, but maybe I’d love to get your thoughts on where you think the regulatory world is heading in the near future.

John McGough: Sure. So as soon as the investment research review was released, the findings of that—surprisingly it did not address corporate access, right? So when it was made public and the managers and the brokers had an opportunity to read it and review it, it immediately prompted the question, “Hey, well, what about corporate access? Can we please incorporate the eligibility of corporate access into any regulatory change that you are about to make?”

And the FCA took a step back and said, “No, we’re not going to do that. We want to look at that separately, and we will have a separate process that we’ll go through to determine the right course of action for that.” So that was a little disappointing to a lot of folks.

But the good news is that the regulator agreed to take a look at it. So we’re hoping that a consultation paper will be following. They said it was going to happen sometime this year, 2025. So we’re hoping that a consultation paper comes out relatively soon for folks to comment and hopefully we can strive to get more parity on both sides for the UK and for the US. So we’ll see—it’s yet to be determined.

Robin Hodgkins: We talked about corporate access. Is there some reason why corporate access is front and center in a lot of people’s minds?

John McGough: Yeah, absolutely. Because corporate access remains, if not the top, one of the top expenditures that managers have when evaluating information to make investment decisions. So because they’re spending so much on it, they would like an opportunity to be able to use CSA to pay for it. So it was a little disappointing that it wasn’t included with PS 24/9 or PS 25/4. But the regulator did say they would address it separately, and we’re hoping that a consultation paper comes out on that soon to address it. And we’ll see how that goes.

Robin Hodgkins: So we’ve talked about a lot of the changes that have happened since MiFID II, talked about last year’s PS 24/9, this year’s 25/4. If you were a broker or an asset manager, are you looking at something that is a huge lift to be able to get back into client commissions? Or is it something you think is more a matter of educating the different parties that are out there? And in fact, the move back into using client commissions for research is something that is not a heavy lift for firms.

John McGough: Yeah. You know, because so much time has gone by—I mean, MiFID II has been in effect since 2018, and here we are in 2025—there are still a lot of people out there who may have just come into the business since then who don’t even know what a CSA is, right? So to a degree, there is a little bit of an educational curve that managers and brokers need to go through. But it’s a matter of now that the rules are out and available now, the playbook is out there, and the managers and brokers have to get everything in place in order to offer the service and to take advantage of the service. And which means obviously that they’re going to need processes and technologies to help them facilitate that.

Robin Hodgkins: Yes. And I know there are a lot of different ways people can get that. We’re not going to get into the details here, but I think we both agree that CSAs are a great advance or return for the UK marketplace. That it’s something with education, with good advice from yourself and from others, will really help move people back into that world and will help the research market. It’ll help the performance, we believe, of all these different firms. And it’s something that we certainly endorse and really are very appreciative to the FCA for that.

I’m also very appreciative to you for spending time with me on this conversation. And I also wanted to mention you’ve put together a great white paper about the timeline of commission management in the UK, and we’ll be sharing that with people that are interested in that. And I know that you are a resource for firms literally around the globe to help them understand CSAs and the challenges of getting back into that. So I’m sure that people will be reaching out to you to get your advice on that. I want to thank you very much for your time today.

I’m really looking forward to what’s going to happen for the rest of 2025 and looking forward to 2026. Thank you very much, John.

John McGough: Thank you, Robin. I enjoyed the conversation. Really appreciate it.

Robin Hodgkins: I’d like to thank John for spending time with us today. It’s wonderful talking to experts in this field, and John is certainly one of them.

If you’re interested in John’s white paper about the timeline of research payment optionality in the United Kingdom, please drop us a note. You can reach me at [email protected]. And if you’re interested in talking to John about all matters CSA, please reach out to John at [email protected].

For more information on Castine, please visit castinellc.com. Thank you very much.