(July 15, 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.

Alex Cardell: Good afternoon everybody, and welcome to our call this afternoon on payment optionality in the UK. As you’ll know, research payment optionality was reintroduced in the UK back in August last year, and extended to include uses and alternative investment fund managers in May this year. So where are we now?

Obviously there’s been a huge amount of attention on this subject. I’m curious to hear from our guest speakers today around whether any UK asset managers have publicly announced that they’re adopting CSAs again, or if many are quietly working behind the scenes on implementation.

And of course, what are the key considerations for any asset managers who are thinking of making the move? All of this and more we’ll be discussing today with our two expert speakers. So I’m delighted to welcome Steve Stone, a partner at Morgan Lewis, and Robin Hodgkins, president at Castine. Perhaps for anyone who doesn’t know you, Robin and Steve, if you could give us quick introductions.

Robin, would you like to go first?

Robin Hodgkins: Sure. Yes, thank you Alex. It’s great to be here. I really appreciate the opportunity to speak on this important subject because it’s front of mind for a lot of people. My name is Robin Hodgkins. I’m the president of Castine Consulting. We do a lot of work around commission management and we’ve done so for the last 30 years as we’ve seen things kind of wax and wane internationally on how commission management is handled.

So there are a lot of new things happening in the UK and I’m delighted to be able to talk about those things today.

Steve Stone: Brilliant. Thank you. I’m Steve Stone. I’m a partner at Morgan Lewis. I practice securities law and my practice focuses on buy-side asset managers and sell-side brokers, including in this very unique ecosystem of research payments. I’ve been involved in this since the MiFID II proposals were first floated in 2014.

It’s always fascinating to see regimes come full circle. It’s kind of like back to the future as we look at what’s going to be happening in the years to come.

Alex Cardell: Absolutely. Okay. We’ve got an hour for the call. The first half hour or so, we’ve got some questions that I’ve prepared for our panelists, but we do have audience Q&A, so if you do have any questions, you can submit your question in the chat function at the bottom of the screen at any point and I’ll do my best to get to your question.

So I think to start us off, Steve, if you could perhaps set the stage for today’s discussion by outlining the current state of policies in terms of research payment in the UK, that would be incredibly helpful.

Steve Stone: Yeah, of course. And I must say what a difference a year makes. So flashback to last July, the FCA released policy amendments, providing optionality in research payments for segregated mandates, opening a partial return to our pre-MiFID II days. But that of course left managers of pooled funds, as Alex mentioned, on the sidelines, including UK UCITS management companies, full-scope UK alternative investment fund managers or AIFMs, small authorized UK AIFMs, and residual collective investment schemes.

The FCA essentially closed the gap a couple of months ago when it issued policy statement 25-4, retreating from a requirement that was proposed in November as part of their consultation, that would have required research budgeting at the fund level, which for many firms was simply a non-starter. So that changed everything.

Substantive research put out a release on Friday. They say the overwhelming majority of European firms are moving to CSA-funded research budgets, and based on a recent survey they did, 87% of respondents predict that at least half of all research budgets will become client-funded within the next two years.

That’s quite a difference from the polling and surveys that had been done over the past year, or even as early as January.

Robin Hodgkins: Definitely. And everything that we’re seeing is saying much the same thing. The change has really been led by the FCA, by Rachel Kent, by the Chancellor. My hat is off obviously to those folks for doing this. We can talk a little bit about how and why this has happened. But certainly, the stage is very different than it was as Steve said, even just a year ago. We’ve all spoken at a lot of these conferences and the momentum has changed very dramatically in favor of payment optionality.

Alex Cardell: There’s a lot of terminology used in all of these things, but CSAs and payment optionality, are they one and the same?

Robin Hodgkins: Not a hundred percent. I think we do use them interchangeably when talking about unbundling and rebundling, but payment optionality does provide the optionality to use commissions, client commissions to pay for research. But it is not a requirement. The FCA has opened up the menu to say you now have choices. You can continue paying from P&L, you can continue using RPAs, or you can use CSAs or maybe CSA-lite as they might call it, to use for payment of research.

And as Steve alluded to, recent surveys have shown the huge groundswell back to using client commissions.

Steve Stone: And so it’s important to understand that in economic substance, CSAs are just a different method for payment optionality. CSAs are fundamentally a payment mechanism. It’s not an inexact term in the US. The SEC changed CSAs to client commission arrangements rather than focus on the term. We’re really talking about use of client commissions to pay for research, the implementation of which is driven by the requirements that apply in whatever jurisdiction you’re in.

Alex Cardell: Yeah, understood. Thank you, very clear. And what are you seeing in terms of readiness amongst the UK asset managers when it comes to CSA strategy and execution?

Steve Stone: Well, look, I think—and I welcome Robin’s views—many global managers had started evaluating rebundling last year, if not before. But they encountered three principal headwinds: one, in the UK, pooled funds that until this year were excluded from the regime; two, in the EU, the slower pace of undoing MiFID II’s research payment regime, slow but deliberate; and three, in both the UK and the EU, the hesitance of being a first mover in this space because of concerns about possible asset owner displeasure about having to bear the cost of research.

With those headwinds now largely dissipated, I think firms are very much gearing up for implementation, looking to 2026 or 2027, depending on the firm’s footprint, number of brokers that are used, nature of clients, et cetera.

Robin Hodgkins: Yeah, and I echo everything that Steve said. The conversations we’re having with people on both the buy side and the sell side are very much in line with that. My colleagues and I have joked about how the conversations have changed from “maybe” to “when,” and the readiness I think of the marketplace is improving dramatically. I think there’s a lot of interest in education to understand what this is all about.

Our surveys and other surveys recently have shown that people in the past were not really ready to consider the return to CSAs. Now it’s practically a hundred percent are saying it’s workable and it’s something that will happen. The question is: How do they get there?

And I think if every asset manager had to do it manually and on their own, it’s going to be a real hassle. And I think they’re looking for leadership from firms such as Paradigm Equilibrium to help them get through the whole process of ramping back up with CSAs.

Just one small addition: there are a lot of people we’ve come across who have never lived in a world of CSAs, so they’re really at a disadvantage and they really are looking for leadership to understand what a CSA is and how to implement it.

Alex Cardell: Yeah, I think that’s absolutely right. Certainly my experience—we’ve talked to lots of clients and the level of understanding does vary hugely. Some people were around when, or operated CSAs at firms, back when they did exist in the UK and others didn’t. So for many people, this is a new thing. And there has been a kind of education process there.

And thank you, Robin, for the little nod there to Paradigm Equilibrium because we have partnered with Castine for our sort of best-in-class CSA solutions. So we’re speaking to a number of clients who are looking to adopt CSAs going forward, and if you do have any questions for me or Robin, or indeed Steve, after the call, then just drop us a line and we’ll do our best to help you.

And there’s also talk of a kind of a domino effect. I mean, maybe that’s no longer such a big deal. I always thought that one or two would go and then the rest would follow. But it sounds like actually from what you’re both saying, that a lot of the buy side are preparing already and that you’re thinking that in 2026 or the beginning of 2026, that’s when we’ll see a lot of asset managers go live.

Will they publicly announce these things or is it—I guess there’s no necessarily any benefit in doing that. But they’ll have done the legwork and they’ll be ready to go.

Robin Hodgkins: I think actually the announcement has already been made by webinars such as this, by surveys and other surveys that are out there. People had been waiting for the domino effect. And I certainly know exactly where I was sitting in 2017, when everything went P&L and the big players moved that way. This time it’s been much more of a stealth movement. But now the barn door is open.

And the assumption in my mind is that it’s going to be a question of who’s going to start before January 2026, and who’s going to start literally in January 2026. It’s not going to be a question of if.

And I don’t think people—I don’t think they’re going to be people that can say, “Yes, we’re going to do it.” And at the most recent conference on this in New York, there are a lot of buy-siders that said, in as many words, that they feel very comfortable about returning to CSAs globally.

Alex Cardell: Great. Thank you. And Steve, for global managers, obviously there’s what I guess you could call sort of misalignment of regimes that they’re trying to navigate. What would the key considerations be for reconciling those different practices across the UK, the EU, and the US?

Steve Stone: Yeah, Alex, this is a great question. The lack of alignment or the differences in regulatory regime and approaches and restrictions have been a big issue, but briefly, under the FCA requirement, there are kind of two things I’d focus on.

One, an asset manager must allocate cost of research under the FCA regime using cost of research procured using client payments fairly between clients, such that the relative cost incurred by the clients are commensurate with the relative benefits received. That’s not the case in the US. By contrast, with disclosure in the US, a US asset manager may assess the reasonableness of research costs in view of its responsibilities for all accounts over which it has investment discretion.

Even if that means that some clients pay through client commissions for research that is not used in management of their accounts. In other words, there’s cross-subsidization. The concept is it all has to come out in the wash, in essence, and that may be where we land ultimately under the FCA regime. It’s not clear. And the FCA has not offered guidance and indeed had indicated that they don’t expect to provide a lot of guidance here—that people should look to the spirit of the regime.

The second thing that’s important is under the UK regime, an asset manager may not enter into research arrangements that would compromise its ability to meet its best execution obligations. By contrast, in the US, under US law, an asset manager would not be deemed to have breached its obligations by paying a higher commission if the asset manager determined that the higher commission was worth it relative to the value of the research. So the research cost goes into the best execution equation in the US but doesn’t in the UK.

There are also really briefly differences in what’s eligible research. So for example, corporate access doesn’t qualify under the FCA regime, and transaction types that can fund research payments. So for example, US non-securities transactions, true principal trades, particularly fixed income are an issue. So thoughtful planning, which we’ll obviously get into through this call, will have to involve cataloging the various jurisdictions, the current state of play in terms of what’s in, what’s out, both on the research products and the covered transactions to come up with a plan, particularly an issue that is complicated for global firms that make investment decisions globally, that place trades through trading centers all over the globe.

It’s a complicated equation. And that may push some of the global firms into implementation in 2027 versus 2026 because of the complexities.

Alex Cardell: Okay. Interesting. Thank you. Robin, anything to add on that one?

Robin Hodgkins: Yes, I certainly think it’s good to be reminded about corporate access, principal trading. What’s different in Europe—we’ll talk about this later on perhaps—is they have a bit of a different interpretation on these things. But what I’ve really seen, and I’ve been one of the people that’s been really critical in the past of the FCA and some of the stuff that happened around MiFID II in 2016 and 2017. What I’m seeing now really to Steve’s point is that the FCA is really looking to open the guardrails—that’s probably the wrong analogy—but to not have a really strict set of rules saying “You must do this exactly as we say.”

I think they want to make sure that clients are treated fairly, that there’s proper disclosure, all those sorts of things. But I think they’re also looking for innovation coming out of the brokerage community and the asset management community as well to say, “Hey, this is how we’re doing our budgeting. We’re—the guardrails allow budgeting by fund, by strategy, by at the firm level, as long as these other caveats that were mentioned are covered.”

And I’m assuming in a couple years there’s going to be a review to say, “Hey, this is working, this is not working.” And I really credit the FCA for doing that. And I think it’s really something that a lot of the global firms that we’re talking to can adjust to. Being able to figure out the difference between corporate access and principal trades and how do you do the evaluations around that.

But I’m not seeing, to the point just made, that the global firms are going to wait until 2027, 2028. The CFO pressure on the profit and loss statements are as strong there as they are for the smallest firm out in the UK.

Alex Cardell: Hundred percent. I’d like to pick up on one of the comments that you both made there around corporate access. Has there been any further progress on that in the UK? I know it was a question—the FCA might come back to that at some point in the future and include CSAs within the scope of this. Are you aware of any changes there? Oh, sorry. When I say CSAs, I mean corporate access, sorry.

Robin Hodgkins: I don’t have a seat at the table in Canary work with the FCA, but the conversations we’ve had really seem to indicate that they’re very open to discussing corporate access. Conversely, they’re not that open to discussing market data. We might talk about the SEC and some of their opinions about principal trading, but that’s a separate issue. Steve, what are you seeing on this front?

Steve Stone: I don’t have a current read on the state of play regarding corporate access in the UK. I frankly had assumed that DFC would come along at some point. I know there’s been industry advocacy focused on that, and I would expect that to continue, particularly as the EU opens up and also covers corporate access, as does the SEC. On the SEC front, it’s certainly on my wishlist to discuss with the SEC in terms of conforming their approach under 20a-d. One of the problems—not a problem with the SEC, but obviously they have their priorities—and this may not be at the top of the chairman’s list.

Alex Cardell: Robin, did you have something else to add?

Robin Hodgkins: I was just going to say that corporate access having such a large role in research is something that I really do believe the FCA is looking at very closely and with a positive spin.

Alex Cardell: Great. There’s a question here around the substantive survey that was highlighted. This question is about the phased rollout of moving to joint payments. What does that mean? Is it that certain funds might adopt CSAs and payment optionality, whereas others might continue to pay from a specific asset manager? Do you see what I mean? They might not roll out all funds at the same time onto CSAs. Are you aware of that?

Steve Stone: Though I haven’t talked to Mike about this, I would expect that part of the issue is whether you’re talking about an institutional account with a separate relationship—a separate account relationship—or a commingled vehicle, where there may be a board. There are going to be agreements that determine the arrangements between the manager and the client, and they may include restrictions on the use of client commissions to fund research payments. In that context, particularly where you have to go to a fund that’s represented by a board, there’ll have to be dialogue. There may be disclosure issues to end investors, and that may take some time to work out.

So for any asset manager, there’s going to be low-hanging fruit in terms of some clients who are not going to care about this—they’ll understand the rationale around returning to CSAs in this context. But for other clients, there’ll need to be discussion, and there may be more formal steps in furtherance of that.

Alex Cardell: That doesn’t create a conflict, I mean, payment optionality, I guess by definition, means there are different ways to approach paying for research and how that research budget is funded.

Robin Hodgkins: Exactly. It’s just the reality of, as Steve said, the paperwork. Some firms have a lot of paperwork they can just resurrect; others have to repaper and change things over. I’m not getting any sense at all from any of the regulators that they’re going to look at this as a conflict of interest or as a problem with a gradual rollout.

Alex Cardell: I was going to ask about the alignment or misalignment of different regimes, whether that would create issues or put global asset managers off adopting. But it sounds like from your previous answer, that is not the case and that the ones you are aware of and have spoken to are lining up and getting ready to go.

So, next question: How can asset managers best articulate the value of CSAs and payment flexibility to asset owners who might be unfamiliar or skeptical? What is the messaging around that?

Steve Stone: I’m happy to lead off. Every firm is going to have to tailor its own talking points, but in my thinking, the key points would include: asset managers and clients have a shared mutual interest in obtaining best execution, not overpaying for transaction costs, and achieving best net performance. If overconsumption of research causes a manager to lag in terms of performance, they get fired, so they have no interest in being in that situation. Research demonstrably contributes to alpha—we’ve seen that in Europe and the UK. The need for real-time, robust research has never been greater than in today’s markets, given the volatility of the markets, the speed at which things are occurring, and the advent of AI and its expanding power and deployment in the space.

At the same time, you have a lot of large managers making substantial research expenditures for AI as part of their deliberative process. That also includes research, and that obviously comes at a cost in terms of buying other research. So in order to make sure that they have access to the kind of quality research that can drive best and informed judgments, this is a win-win situation for both client asset owners and managers.

Of course, it’s not without guardrails. Both the EU framework that’s coming down the path and the FCA framework that was hammered out and went into effect last August, as well as the US and other frameworks, have guardrails and provide for transparency that protect investor interests.

Robin Hodgkins: Look, if you go back to MiFID II, I don’t think there was anything in the creation of MiFID II that said, “Hey, we’re looking to impact performance. We’re looking to shut down research firms. We’re looking to narrow the available research in the marketplace.” That was just an unintended consequence of what happened. I think now the conversation with asset owners is really about performance, performance, performance.

Research did shrink when it was being paid for with P&L. The idea of the FCA is that we don’t want you to spend the same amount of money—we want to encourage you to spend more money. The way to do that is to involve the client, the asset owner, in that conversation using their commissions, which is a very small amount. The amount of money spent on research is minimal.

Alex Cardell: I remember a panelist previously saying that the cost of research is measured in low single-digit basis points, whereas performance of funds is measured in hundreds of basis points.

Robin Hodgkins: Exactly. The conversations—I’ve not had direct conversations with asset owners, but I know firms that have—and it’s been more a matter of, as Steve mentioned in an earlier question, people were afraid to talk to their clients. In fact, when they did have those conversations, the clients were like, “This is okay. Let’s see how this works. We’re going to expand the research marketplace. We’re going to get, in theory, better performance, and it will all be revealed in a positive way. In a couple of years, maybe we can reevaluate, but it’s working in the states. Performance is good in the states, so it should also carry forth to the UK.”

Alex Cardell: Steve, in terms of this process, is obtaining asset owner or client consent a regulatory requirement under PS 24-9, or more of a commercial best practice?

Steve Stone: Affirmative client consent was proposed, but formal client consent or agreement isn’t required by 24-9. It only requires disclosure to clients on the firm’s approach to joint payments, including if and how joint payments are combined with any other payment option, the most significant research services purchased, and the cost incurred.

Obviously, commercial practice changes the equation a little bit and will have to address at least two things: any client agreements that contain restrictions on use of client commissions to fund research, and frankly, the dynamics of client relationships that will compel asset managers to socialize the use of joint payments.

So you can envision that for major clients, there’ll be affirmative reach-out. There probably will not be a press release that goes out before those discussions have occurred. We were talking about the timidity of some asset managers to go out to clients, and that occurred largely in times when markets were down and performance was lagging. But in reality, even if we encounter that kind of situation, we’re in an environment where, in strong markets or lagging markets, everybody is in the same situation—the velocity of change is so significant that research is more and more important in this environment and changes the dynamic of the dialogue.

Alex Cardell: Great. Thank you. Robin, anything on that one?

Robin Hodgkins: I love the phrase “velocity of change” because it is astounding how fast things are changing. In conversations we’ve had with people who say, “Well, what’s going to happen with AI in the future? How’s that going to be paid for?” people have no idea what’s going to be coming down the road 6, 9, 12 months from now.

So to be able to have a way to get access to research from the best minds possible—this is what payment optionality and specifically CSAs bring to the table. There’s also the aspect of due diligence. The asset owners are assuming you’re doing your due diligence. We have a lot of firms we work with that do extensive due diligence around that. Those things have not stopped. It’s not going to be an open playing field. There will be guardrails, but they’re not going to be tight guardrails, and I think the clients appreciate and understand that.

Alex Cardell: Brilliant. Robin, do you think that firms should be building an education component into their CSA rollout strategy to ensure alignment with the clients and asset owners?

Robin Hodgkins: Definitely. I think that’s an important aspect of it. There are many ways people can get to understand the whole concept of CSAs—what the disclosure requirements are around that. Attending webinars like this and conferences—there are a lot of conversations we’ve had with people where it’s very clear that they just don’t understand CSAs. It’s not something you can just pick up in a day. We’ve been doing this for 30 years, so we understand a lot of the ins and outs of CSAs. But if you’ve never understood about eligibility and what kind of trades are allowed, and the whole issue of best execution separate from research, these are things that education can really make a big difference with.

Alex Cardell: We’ve got another question that’s come up. Any expectations on whether research services from brokers will still be liable for VAT if paid through joint payment mechanisms or commissions? This could be another key differentiator to other jurisdictions. Steve?

Steve Stone: I don’t think anything has changed under the optionality framework.

Alex Cardell: I’m not aware of anything either. So it’s the same—it would be the same whether you’re paying off P&L or through commissions if you have a research budget.

Robin Hodgkins: VAT is still VAT. The government’s got to get their piece, unfortunately.

Alex Cardell: They sure do. When it comes to documentation, can legacy CSA or RPA agreements be repurposed for new CSA relationships, or do firms need to start from scratch? A question for Steve.

Steve Stone: As Robin alluded to, because different firms have different experience and different documentation, this will be a mix, depending on whether firms have prior arrangements that are documented, and if they do, how those prior arrangements work. I would expect that everybody’s going to be fairly commercial here and try to avoid opening up for renegotiation a broad scope of relationships and arrangements, and use side letters or supplements to more tactically deal with the new arrangements. I would expect that sell-side participants would play ball here.

Alex Cardell: Another question that comes up a few times: for those firms that are already operating under RPA, the conversations I’ve had suggest they’ve seen less point in moving to CSA. Do you think that’s fair? Obviously there are benefits of CSAs over RPAs, but if you’re going from P&L, you wouldn’t go from P&L to RPA—you’d go from P&L to CSA. But if you’re already operating RPA, there’s quite a lot of work involved in moving to CSA, but if you’ve got the mechanisms in process—what are your thoughts around that, Robin?

Robin Hodgkins: I think certainly if you’re going from P&L, you should go directly to CSAs. That makes the most sense. If you’re in an RPA agreement right now with the firms you work with, you have payment optionality as to how you want to handle that. Systems that are out there that firms use allow changes from RPAs over to CSAs pretty easily. The reporting and disclosure around that is pretty straightforward, so it’s not a heavy lift to do that.

I certainly have had conversations with firms who say, “Look, we’re using RPAs. It’s working for us just fine. We’re not going to make a change right away on that.” But there is certainly a hint in the back of their minds that they are going to move over to CSAs, maybe not as fast as someone where the CFO is pushing the P&L pressure to move to CSAs, but I would think that in a matter of very few years, RPAs will be a memory.

Steve Stone: Agreed. As you think about the tranches and implementation of CSAs, it’s going to be the separate account mandates first, then funds or more complicated institutional clients like pension funds, and third will be the RPAs because we’re already not paying for research out of P&L for an asset manager. So the economic incentive is not quite the same, but there’s more flexibility in the CSA framework.

Alex Cardell: Great. There’s another audience question. Obviously earlier on we were talking about different jurisdictions and alignment of rules in the EU specifically. Could you give a bit of an update as to where they are and what the timeframes are? What’s the state of play in the EU?

Robin Hodgkins: I think there’s some phrase about “the mind is willing but the body’s not there,” and maybe vice versa. Looking at Europe, the sense that I have is that they are fully ready to go to full CSAs. The eligibility and a lot of the issues that are restricted in the UK are not going to exist in the EU. They already kind of followed the MiFID II regimen several years ago, I think unwillingly. They are now more than willing to return to full CSAs in probably the most liberal interpretation around.

However, there is the “U” of the EU—it is a union. They have to do things as a union. So there’ll be movement this fall around the approval and regulations around that. I’m sure Steve has much better vocabulary than I do on that.

Steve Stone: I think that’s right. Obviously you also have to have the further step of transposition of any directive or revisions to directive into legislation in the member states, and that’s going to take some time. There’s been debate about whether individual member states might, in the lead-up, provide essentially no-action guidance to allow firms to proceed more quickly into the rebundling. But we’ll have to see.

Robin Hodgkins: But the sense I have from some of the EU countries is that corporate access is fine, principal trading is fine, market data is fine. They were not the ones behind MiFID II. They ratcheted down to get along with their neighbors, but they wanted to be much more liberal in their approach going forward.

Alex Cardell: Great. Steve, what does a well-structured implementation roadmap look like for firms adopting CSAs?

Steve Stone: This is not a simple task for most firms, but it really depends on the DNA of the asset manager’s business and their client base. In no particular order, obviously one has to ascertain the desired end state and timing and work from there.

There’s a legal and compliance aspect, which will mean analyzing the coverage jurisdictions, the classes of regulatory requirements that we’ve talked about, evaluating client agreements in the UK, evaluating the current processes that the firm has to address fair allocation and covering it under the new requirements—because I think that’s something that, from an FCA perspective but also a client perspective, is going to be an important consideration.

Obviously, there has to be engagement with brokers to assess the impact on current arrangements. Remember that when the SEC allowed the safe harbor letter to sunset, a lot of the booking models changed in terms of research having to be provided out of London as part of a global arrangement. As shops move back into soft dollar arrangements—to use the US term—there’ll be greater flexibility in terms of procuring research in the US, and that may change the arrangements with brokers.

By and large, the sell side in the US is not eager to really spend a lot of time on this because they were burnt out just having to deal with the post-safe harbor letter situation. But understanding how you’re procuring research will be important to see if the engagement with brokers is going to change.

Obviously there’s going to be a significant technology licensing or build-out process, client engagement—we’ve talked about policies and procedures, ongoing review. There are a lot of different moving pieces here, but I welcome thoughts from Robin since that’s what you do.

Robin Hodgkins: Yes, I mean, as far as the technology side of things, there are a lot of things that technology can bring to the equation. We’re only one of several vendors that provide that, but we’ve been doing it for a long time. Tracking all the agreements, tracking all of the different rates, tracking all the budgets—that’s kind of apple pie for the technology providers that are out there.

But I think the issue is finding ways to use technology as efficiently as possible. A lot of firms are looking to re-enter the space with spreadsheets, keeping track of all the different tasks manually. That’s something that I would really caution against because, whether it’s our technology or someone else’s technology, there’s a reason we exist—it’s to really reduce the operational risk and also the time to adopt for some of these things.

Alex Cardell: Is it worth giving a brief explanation, as I think a lot of people on the call will understand this already, but there might be some that don’t? Certainly from our perspective, we’ve now got Castine fully implemented and it does, as you say, do the heavy lifting. We have a trade file loading into Castine every day. So I think if you’re doing this on spreadsheets, it’s easy—perhaps easier if you’ve got one or two CSA clients, but suddenly the numbers could increase exponentially over the coming couple of years.

But do you think there’s still a role for human oversight as well in terms of the process? You talk about technology, but humans are still critical in this, I assume?

Robin Hodgkins: Yeah, a hundred percent. And I appreciate your kind words about us. But beyond that, going back to an earlier point about the number of firms that are going to be coming to the gate for CSAs in the next few months is going to be huge. There’s a very strong need for internal leadership within a firm, especially a global firm, where they can set up quarterly meetings and provide oversight.

They need to have the right people involved. They need to have the right education involved to make sure that they know what they’re doing. But I would really caution against adopting technology without oversight, the same way I would caution against adopting research without due diligence.

There are great solutions out there, but as Steve said, everybody has a different way of approaching the evaluation, the agreements, all those sorts of things. Each firm—it’s not a cookie cutter. Each firm has to look at how they want to roll these things out. Do they want to do it in a very cautious manner? Do they want to go in gung-ho? How do they resolve the different regional issues, corporate access, and so on and so forth? And how do they explain this to their traders? How do they explain this to their research people? How do they explain this to the compliance people that are looking to bring on new research? Is it eligible?

There are a lot of things where human oversight is critical. It’s not something where it’s going to be 10 people full-time for a year, but you need to have a qualified person help guide the re-entry back into commission management.

Alex Cardell: Thank you. There’s a question that’s come up here, which I think is a good one, essentially around the fact that it sounds like all these firms are moving towards CSAs, both on the buy side and therefore on the sell side. Is there going to be a sort of bottleneck in terms of paperwork, setting up CSAs, the technology required, the requirement on your time as vendors and advisors on the legal side, et cetera? Might that delay the rollout of CSAs?

Robin Hodgkins: Yes, I certainly expect that there’s going to be not only a backlog, but there’s going to be a funnel effect as firms come into this. We’re talking to a lot of brokers. We’re talking to a lot of buy-siders about this—people that want to have their own internal systems from the buy side, people who want to have their own client management systems from the sell side.

There are only so many days between now and January 1st, and I’m really glad that Mike and his survey came out now because I’m really hoping it’s going to energize people to say, “Look, we cannot waste time to do this.” There’s a lot of paperwork, there are agreements, there’s a lot of stuff that has to happen outside of technology. But then there is a lifecycle of technology. There are firms that go into a code freeze in December—they’re not going to do any rollout of new software in December or January perhaps.

So you really need to make sure that you tackle this as soon as possible and don’t wait until the last minute. But also, I really do think—I agree with the person who asked the question and their implication—that firms in the UK will probably start with a few CSA relationships, and then maybe broaden those over time versus making all of their trading relationships CSA relationships.

Alex Cardell: Yeah. And actually, part of that question was: how many CSA brokers does an asset manager need to be able to fund the research budget and adhere to best execution? You’d be trading with non-CSA brokers as well, but if they’re trying to fund their research budget, there is a need to trade with those CSA brokers to fund those budgets. So is there a recommended number? I presume it’s not that straightforward.

Robin Hodgkins: Well, first off, there’s a complete separation of church and state between execution and research. So they really have to always find best execution, and that’s going to be paramount in the decision. And then how do they fund their research? It’s sort of a question of how many CSA arrangements do they want to have? And I would counsel a handful—five, ten, something like that. But that’s a different view than the best execution piece of things.

Alex Cardell: Sure. And presumably also, one of the other levers is not just the number of CSA brokers you’re using, but the amount of research basis points you are adding on to your commission payments to fund the research. So you can increase that to fill the research pot, presumably.

Robin Hodgkins: Yeah, you can certainly change the rates, you can change the add-ons. But best execution has got to come first and foremost. And the beauty of CSAs is that the person you trade with can maybe build up a wallet, but they don’t have to be the ones you’re paying the wallet to. You can pay a wallet to somebody else.

Steve Stone: Absolutely. One thing that’s important to this is that as everybody’s rushing to get to January 1st, at the same time, you’re going to have regulatory monitoring of what’s going on, whether it’s the FCA, the competent EU regulators, or the SEC. And so any significant change of this sort is also one that you could expect to get questions about. So as firms go through the planning process, they should also think about how they would respond to questions or challenges from a regulator about how they did the transition. Because as part of the transition, a manager could do things that also implicate their compliance with law in other jurisdictions.

Alex Cardell: Understood. Thank you. A different question that’s come up, and one I’m always slightly nervous to ask: obviously another party in the dynamic and mechanism of paying CSAs are the aggregators. So if you’re an asset manager, you might have 10 CSA brokers, and rather than managing 10 separate pots, you as the asset manager can decide to use an aggregator. So all of your 10 CSA brokers route their separate pots into one centralized pot, which is managed by an aggregator.

Now in the US, aggregators are paid by the brokers, the sell side. So there’s a fee that’s paid by the sell side to the aggregation services. In the UK, I think there’s a question of whether that could be perceived as being an inducement to trade, and therefore there was some talk of that not being permissible—i.e., the regulator would not allow the brokers, the sell side, to pay the aggregators. Because of course, in doing so, if we at Pam Rum are asked to use an aggregator by one of our institutional investor clients and we have to pay to do that, then we are going to want a certain amount of trading from that client to cover the cost of doing so. So where are we with that? Steve, I don’t know if you have thoughts on that one.

Steve Stone: I’m not aware of any resolution of that issue. I think firms may reach different views depending upon their arrangements and the advice they receive from counsel. I guess I would also point out that another issue that should be focused on in the context of aggregators is where is the money and what protections are associated with it—whether it’s UK client money rules or in the US protections there.

Not to go back too far, but in the Lehman bankruptcy, the soft dollar credits maintained by Lehman were not given customer status in the Securities Investor Protection Act liquidation. It was treated as unsecured claims. And so firms, at least to the extent that they allow cash to accumulate at an aggregator, have to think about it from the standpoint of what protection exists for the assets. By the same token, while cash does accumulate with an aggregator, managers should avoid a situation where they’re constantly rolling over cash that accumulates because they’re over-consuming or over-expending for the research. That shouldn’t occur under the UK framework, but it’s something we still see in the US and should be watched.

Robin Hodgkins: Yeah. And my understanding—I’m not a lawyer, I don’t play one on TV—but from the standpoint of my understanding, it is completely viewed as an inducement.

Separately, as far as the aggregator fees go, I think there are a lot of great aggregators out there. They provide a good service to the marketplace. But the way the fees are charged, some of them are very, very high transaction-based fees. I’ve never been a believer in the transaction-based funding for aggregators. I think there are a lot of services that brokers provide to their clients that are not considered inducements, such as their own trading platform, for example, connection charges, those sorts of things.

So I think the idea of reasonable fees is fine. I think there’s much more of a move for the fees to be split between the brokers and the asset managers. But the idea of having an uncapped or, in essence, an uncapped high end of the transaction charges—I think that really would not play well with the asset owners because, in effect, the money is being paid for by the brokers, but it’s still affecting, at the end of the day, the actual asset owners and their performance.

Alex Cardell: Brilliant. Thank you. That’s clear. Let me just read this. I haven’t had a chance to pre-read it. “If one chooses 10 CSA brokers, which are historically their top 10 trading partners, then if the brokers pay the charges, do you think this could really be seen as an inducement?” I don’t know if we’ve answered that question well.

Robin Hodgkins: Yes, I mean, I think the brokers are being required to pay transaction charges to an aggregator. I think that’s viewed as an inducement.

Steve Stone: I was going to say, how do you include it as investment research? And you have a different outcome perhaps in the United States because Section 28(e) covers brokerage services. And so the aggregator, depending on the structure and the services, might constitute brokerage services, might not.

Alex Cardell: Okay. Understood. Thank you. We’ve got about 10 minutes left. So if CSAs and payment for research are here now—they are reality and we’re discussing that it sounds like by next year, we’ll see a lot more of them actually being in effect—what’s next in the UK and Europe? Is there a sense of what’s coming?

Robin Hodgkins: I think we’re just going to be more gung-ho on this. Our teams in England, Portugal, we have teams in France now—we’re all very focused on what’s happening today in the UK and what’s going to be happening soon in Europe. A lot of the time we’re spending here in the States is also focused towards this.

But I think, back to the earlier point, the main thing that I see as far as the UK market is far more widespread adoption than was anticipated six months ago. I believe corporate access will be allowed as well, and that the FCA will continue to have strong but generous guardrails to provide feedback as to what’s working to the marketplace rather than being a “we’re going to do sweeps every day” kind of regulator. That’s my pure opinion.

Steve Stone: Look, I agree. Obviously I think a lot depends on the political cycles. And in the current government regime, I think Robin’s entirely right. I don’t see a return to the Minors Report-style scrutiny of research arrangements. We’re just not in that environment right now.

Robin Hodgkins: Bad actors will get slammed very quickly. But they don’t exist in my world. I just don’t see them. And I think the regulators would be on top of any bad acting that happened. But other than that, they’re looking for the market to provide answers.

Steve Stone: Yeah. Well, I think even beyond that, I think both regulators in the UK and Europe and the SEC are all looking to rationalize the requirements applicable to the asset management businesses and to provide some flexibility and reform. And so I think it’s kind of onto the next reform.

Robin Hodgkins: And I mean, I guess the overarching issue is the pressure from the CFO on the P&L is going to be heard very loud and very clear, both domestically within the UK marketplace, but also globally, that firms will be returning to CSAs. So I think that’s just echoing what this whole meeting has been about.

Alex Cardell: Yeah. Okay. Brilliant. I think that’s probably a good place to end, looking forward into the future. So there are no more questions from the audience. I think that’s hugely helpful. Thank you, Robin and Steve, and for everyone on the call, thank you for joining us.

If you do have any questions for any of us individually, just drop us a line and as I say, we’ll be happy to help funnel them to me or our CIR investor relations team.