03 June 2020

ESRB issues recommendation on liquidity risks in investment funds

Date: 15 May 2020

By Alex Gillespie

On 14 May 2020, the European Systemic Risk Board (ESRB) published a recommendation on liquidity risks in investment funds. The ESRB acknowledges the fact that the coronavirus disease and necessary containment measures have been a severe and unprecedented shock to European economies. In this context, the ESRB has previously announced that it would focus on five priority areas where coordination between authorities in the European Union was likely to be particularly important to safeguard financial stability in the Union. One of these priority areas relates to financial market liquidity and the implications for asset managers and insurers.

The ESRB notes that the sharp fall in asset prices observed at the onset of the COVID-19 pandemic was accompanied by significant redemptions from certain investment funds and a significant deterioration in financial market liquidity. Whilst market conditions have subsequently stabilised, the ESRB is aware that significant uncertainty remains concerning the macrofinancial outlook.

The ESRB recognises that the investment funds sector is large and diverse and therefore focuses on two segments which it believes to be particularly high priority areas for enhanced scrutiny from a financial stability perspective, being funds with significant exposures to corporate debt or real estate.

The ESRB recommends that the European Securities and Markets Authority (ESMA):

  1. coordinates with the national competent authorities to undertake a focused piece of supervisory exercise with investment funds that have significant exposures to corporate debt and real estate assets to assess the preparedness of these two segments of the investment funds sector to potential future adverse shocks, including any potential resumption of significant redemptions and/or an increase in valuation uncertainty; and
  2. reports to the ESRB on its analysis and on the conclusions reached regarding the preparedness of the relevant investment funds.

ESMA must communicate to the European Parliament, the Council, the Commission and to the ESRB the actions undertaken in response to the ESRB’s recommendations and substantiate any inaction. The ESRB requests that ESMA submits this communication by 31 October 2020.

The ESRB also published a statement in relation to the use of liquidity management tools, please see our blog post below for further details.

For further information, a copy of the recommendation can be found here.

ESRB issues statement on liquidity management tools

Date: 15 May 2020

By Alex Gillespie

The European Systemic Risk Board (ESRB) has issued a statement on the use of liquidity management tools by investment funds with exposures to less liquid assets.

In its statement, the ESRB notes that its previous assessments of non-bank financial intermediation have highlighted potential vulnerabilities from investment funds that have short redemption periods but invest in less liquid assets. The ESRB believes that such a mismatch between redemption profiles and the liquidity of assets held by some investment funds increase the risk that, in the event of large redemptions, they may have to sell less liquid assets quickly, which could contribute to further falls in asset valuations and add to strains on market liquidity.

The ESRB stresses the importance of the availability and timely use of liquidity management tools, especially in times of stressed market conditions. The ESRB notes that the availability of liquidity management tools has not yet been harmonised across the EU, raising challenges to the consistent application of such tools. The ESRB refers to its 2017 Recommendation on leverage and liquidity in investment funds which proposed making a diverse set of liquidity management tools available to fund managers to help them deal with redemption pressures when market liquidity is low. It comments that recent market developments highlight the need to make progress in implementing this Recommendation and to introduce adequate legal backing for the use of such instruments.

A copy of the full ESRB statement can be found here.

FCA publishes statement on firms’ handling of post and paper documents during the COVID-19 pandemic

14 May 2020

By Ciara Davies.

On 13 May 2020, the FCA published a statement on how firms should handle post and paper documents, recognising that in these exceptional times, some firms may not be able to fully comply with them. The FCA asks firms to continue to comply with the requirements for post and paper-based processes, but recognises that in the current circumstances, this may not be fully possible.

Firms need to notify the FCA as soon as possible if they believe that they will be unable to comply. The FCA asks firms to ensure that customers are not disadvantaged because of delays and to make a particular effort to contact customers who do not access services online, with a particular emphasis on supporting vulnerable customers.

Firms must also mitigate the impact of any non-compliance with postal and paper processes and demonstrate the steps taken to do this to the FCA. The aim is to return to full compliance as soon as possible.

Firms also need to provide general updates on how they will treat post and cheques through their website and other channels, such as social media. In addition, customers who have sent instructions or cheques that have not been processed should be asked to contact the firm urgently by telephone or electronic means. Where possible, customers should receive the services or cover they require. For example, this could include retrospective cover. Although, the FCA warns that where uncashed cheques are client money under the CASS regime, the firm must consider whether proceeding in this way might breach CASS rules and expose its other clients to a risk of client money shortfall.

FCA publishes a letter to the Financial Ombudsman Service (FOS) Chief Ombudsman and Chief Executive, regarding how the FOS will handle complaints arising from firms’ acts or omissions during the COVID-19 pandemic

12 May 2020

By Ciara Davies.

The FCA has introduced a range of targeted temporary measures that are aimed at helping consumers through this difficult period. The measures all have one thing in common: ensuring that firms can work at pace and under difficult conditions support their customers.

Some firms have raised concerns about how the FOS will consider complaints arising from their acts or omissions during this time. To that end, the FCA asks the FOS to confirm that in determining what is fair and reasonable the ombudsman will take account of operational challenges faced by firms during this period, as well as the FCA’s revised expectations of what constitutes compliance with its rules, guidance and standards. Where the FCA has issued guidance that gives firms additional flexibility, the FCA asks the FOS to confirm that it will take this into account.

IA publishes guidance on suspected dividend payments and investment funds

Update posted: 12 May 2020

On 1 May 2020, the IA published a Q&A guidance document on suspended dividend payments and investment funds. The Q&A provides guidance on the issues that firms have raised, or anticipate will arise, as a result of COVID-19 creating exceptional circumstances for funds and capital markets.

The Q&A addresses guidance published by regulators including, the Financial Reporting Council, which has urged companies to ensure that they maintain sufficient capital reserves, and the Prudential Regulation Authority, which has required major banks to suspend all dividend payments and share buybacks until the end of 2020 and to cancel all outstanding 2019 dividend payments.

The first question in the Q&A is: How do AFMs treat funds with an income objective if companies are not paying dividends?

The IA’s guidance provides that this depends on the wording of the fund’s objective. Funds with a stated aim of providing income will not be in breach of their objective if it can be satisfied that investment decisions were made in line with that objective, but later corporate decisions reduced the amount of income available. However, for funds with an income target this can be more of an issue.

The IA also recommends that risk warnings should be reviewed in investor communications and be enhanced to give added prominence. It may also be necessary to amend the objective if it will not be achievable over the longer term.

The product review process needs to ensure that where there is a failure to meet a fund’s objectives, this is fully considered and justified. AFMs in the process of producing a fund’s value assessment may wish to consider explaining the challenges faced in the narrative of the value assessment.

The Q&A also addresses the impact of the current market challenges on the sector criteria for income funds. The IA informs members that it will continue to collect and publish information on funds’ income delivery in order to be fully transparent, but will suspend minimum dividend requirements. The hope is that this will allow funds to focus on sustainable investment strategies rather than focusing on meeting the IA’s requirements in the short term.

Finally, the IA provides a response to the question of whether it is a pricing breach if accrued dividends are subsequently cancelled. The IA identifies a number of scenarios that arise due to the relationship between the timing of the dividend cancellation and the fund’s XD and pay dates. It is emphasised that all the scenarios have in common the need for procedures to be in place to ensure that dividend cancellations are identified and recorded in a timely manner to avoid pricing errors.

FCA provides update on the approach firms should take when handling complaints

Date: 8 May 2020

By Ciara Davies.

On 7 May 2020, the FCA updated its statement on how firms should handle complaints during the COVID-19 pandemic

On prioritising complaints, in its statement, the FCA has stated that it expects firms to prioritise promptly paying complainants who have been offered redress and accepted that offer. In addition, those who are vulnerable to harm if their complaint is not resolved promptly or fairly should also be prioritised alongside micro-enterprises and small businesses who are likely to face serious financial difficulties if their complaint is not resolved promptly and fairly.

The FCA asked firms to be aware of the fact that COVID-19 and the associated public health measures would be likely to exacerbate the personal circumstances that cause vulnerability.

Any firm that is experiencing material difficulties in complying with chapter 1.6 of the Dispute Resolution: Complaints sourcebook should let the FCA know and relay the steps it is taking to manage and address its non-compliance.

The FCA refers to letters it has exchanged with the Financial Ombudsman Service (FOS) that provide additional clarity for firms on how the FOS will approach complaints during this time.

FCA issues updated statement on the impact of Coronavirus on LIBOR transition plans

Date: 30 April 2020

By Ciara Davies

The FCA and the Bank of England have been working with members of the Working Group on Sterling Risk-Free Reference Rates (RFRWG) to consider how firms transitioning from LIBOR have been impacted by Coronavirus.

In its updated statement the FCA recognises the challenges posed by the current environment and notes that it was pleased to have seen continued progress on LIBOR transition (developments include the first syndicated loan that will link to SONIA and SOFR and the first bilateral loan referencing SONIA in the social housing sector).

In the statement, the RFRWG make the following recommendations:

  • By end of Q3 2020, lenders should be able to offer non-LIBOR products to customers;
  • After the end of Q3 2020, lenders, working alongside their borrowers, should include clear contractual arrangements in all new and re-financed LIBOR referencing loan products to facilitate conversion ahead of the end of 2021. It is envisaged that this will be through pre-agreed conversion terms or an agreed process for renegotiation to SONIA or other alternatives; and
  • All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.

The FCA, the Bank of England and the Chair of the RFRWG will support the delivery of a RFRWG workplan in key areas that will continue the momentum on LIBOR transition. Key actions include:

  • Publishing the RFRWG's analysis on, and considerations for, dealing with 'tough legacy' contracts;
  • Building on the strong consensus on how to calculate a fair credit spread adjustment in legacy cash products to assist transition from LIBOR in cash markets; and
  • When plans and working arrangements disrupted by the Coronavirus begin to stabilise, the RFRWG and its members will intensify communication with customers needing to move away from LIBOR as part of transition.

For further details, a copy of the statement can be found here.

Trade associations request ESMA consider flexible and pragmatic approach to mandatory delegated reporting effective date under EMIR Refit Regulation, to reflect the difficulties posed by the coronavirus pandemic

Date: 28 April 2020

By Ciara Davies

On 27 April 2020, the International Swaps and Derivatives Association (ISDA) published a letter that it sent to the European Securities and Markets Authority regarding the mandatory delegated reporting effective date under the EMIR Refit Regulation ((EU) 2019/834)), in the context of the coronavirus pandemic. The letter was sent on its own behalf as well as on behalf of the Association for Financial Markets in Europe, the Asia Securities Industry and Financial Markets Association, the Global Financial Markets Association and the Securities Industry and Financial Markets Association.

Under the EMIR Refit Regulation there is a requirement for financial counterparties (FC) to be responsible and legally liable for reporting on behalf of the non-financial counterparties (NFC) that are not subject to the clearing obligations, with which they trade (as of 18 June 2020). Issues arise if:

  • NFC clients are unable to provide the data needed by the FCs in order to report; and/or
  • FCs have been unable to make the required preparations to support taking on this additional reporting obligation.

The Trade Associations request that ESMA state an expectation that the National Competent Authorities should not prioritise supervisory actions in respect of the mandatory delegated reporting requirements and that they should generally apply their risk-based supervisory powers in day-to-day enforcement of this requirement in a proportionate manner for a period of just over 5 months (until 21 November 2020). This approach would only apply in the scenario where the relevant market participants are not able to comply with the mandatory delegated reporting requirements.

For the avoidance of doubt, where NFCs have fulfilled their obligations to provide all relevant data to FCs before 18 June 2020, they will no longer be responsible for reporting its trades, because the FC will have assumed responsibility for reporting OTC derivative trades on behalf of the NFC. That will be the case even if the FC is not itself in a position to report the NFC trades as of 18 June 2020.

The letter provides an outline of the challenges that market participants are currently expiring as a result of the COVID 19 crisis, which, the trade associations believe justify such a pragmatic and flexible position being taken.

For further details, a copy of the letter can be found here.

Investment Associations publishes circular on accounting for dividends cancelled due to COVID-19

27 April 2020

By Natalie Lim.

The IA on 24 April 2020 published circular 177-20, setting out the implications for distributions due to be paid by funds and the steps to be taken to avoid pricing errors.

The circular is published as many of the companies in which funds invest have suspended or cancelled dividend payments due to COVID-19. In summary:

Managers’ obligations

Fund managers are responsible for calculating income available for distribution. They should ensure that robust procedures are in place to evaluate the risk of not receiving the income accrued at the end of the period and make appropriate provisions. In doing so, fund managers should consider the risk of pricing errors where income is initially recognised and subsequently cancelled. It may also be necessary to keep the available distribution amount under review for longer than the standard timeframe anticipated by auditors’ rate clearance practices. 

As previously highlighted in circular 114-20, fund managers should have regard for the income provisions in the SORP, in particular paragraph 2.27 (providing for income not expected to be received). Moreover, the implications for bond funds of coupon payment defaults on interest received and amortisation schedules should be considered in light of paragraphs 2.44 (income from bonds should reflect reasonable commercial expectations) 2.49 (income from bonds should be accrued at the appropriate rate) and 2.51 (providing against income in the light of uncertain coupon payments and amortisation schedules) of the SORP. 

Dividend cancellation scenarios and steps to avoid pricing errors

Due to the relationship between the timing of the dividend cancellation and the fund’s XD and pay dates, there are a number of scenarios which arise, all of which require procedures to be in place to ensure that dividend cancellations are identified and recorded in a timely manner in order to avoid pricing errors. In particular:

  1. Where a dividend is accrued and cancelled during a single distribution period, the cancellation will cause there to be a fall in the income accrued in the net asset value. 
  2. Where a dividend is accrued in one distribution period and cancelled in a subsequent period before the distribution for the first period is paid, it will be necessary to adjust the amount of the fund’s distribution. There will also be a corresponding accounting adjustment to the net revenue underpinning the amount available for distribution. There will be no change to the net asset value of income shares because the value of the dividend would already have been removed on the fund’s XD date. However, the cancellation will cause the net asset value of accumulation shares to fall.
  3. Where a dividend is accrued in one distribution period and cancelled in a subsequent period after the distribution for the first period is paid, it will not be possible to adjust the amount of the fund’s distribution. In such cases the corresponding accounting adjustment to the net revenue will cause the amount available for distribution to be less than the actual amount distributed resulting in a deficit on the income property.
    1. In the case of an interim distribution, the deficit should be carried forward to the next distribution period within the same annual accounting period and will cause a reduction in the next distribution. There will be no change to the net asset value of income shares, but the net asset value of accumulation shares will fall.
    2. In the case of the final distribution, the deficit should be made good from capital in accordance with COLL 6.7.10R(2). This will cause there to be a fall in the net asset value of both income and accumulation shares.

The IA recommends engaging with auditors and fund accountants at the earliest opportunity. It intends to issue further guidance concerning disclosures by funds with income objectives shortly.

Investment Association (IA) issues new guidance on equity income sectors in light of COVID-19

Date: 24 April 2020

By Natalie Lim.

On 22 April 2020, the IA released new guidelines on the UK equity income and global equity income sectors in light of the COVID-19 outbreak.

The pandemic has prompted many companies to review their dividends, with some suspending or postponing payments. This has impacted on equity income funds as some are unable to meet the requirements to be included in the equity income sectors, including two tests based on the annual and three year rolling average yields of the FTSE All Share and the MSCI World indices. 

In response, the IA has issued new guidelines designed to prevent any short-term disruption to these sectors, so that savers can continue to easily identify and compare equity income funds. They will also enable fund managers to focus on long-term outcomes for savers, instead of potentially needing to make immediate changes to meet sector requirements. 

The following measures have been introduced with immediate effect:

  • For funds with a year end after the end of February 2020, the enforcement of the annual 90 per cent yield threshold test will be suspended. This suspension will last twelve (12) months and means that any fund currently in these sectors which does not meet the annual yield limit will not be automatically removed from the sector.
  • The enforcement of the three year test will be similarly suspended, subject to further review.
  • Monthly monitoring data will continue to be published publicly on the IA’s website to ensure ongoing transparency.

FCA updates its expectations of funds

Date: 16 April 2020

By Natalie Lim.

On 15 April 2020, the FCA updated its webpage setting out its expectations of funds. The webpage was first published on 6 April and covered a range of topics in light of the COVID-19 crisis.

The regulator has now added information to the page on the following:

1. 10 per cent portfolio value reporting – The FCA previously published a Dear CEO letter addressed to firms providing services to retail clients on COVID-19 issues. The letter included statements on supervisory flexibility concerning firms’ obligations to notify investors about depreciation of values of portfolios or leveraged positions by 10 per cent or more. The FCA has now confirmed that the statements in the letter, including 10 per cent portfolio value reporting, apply to non-retail client business performed by MiFID investment firms and collective portfolio management investment firms to the extent that the requirements are applicable to those firms.

2. Repo use for liquidity management – Firms have queried whether repo transactions can be used within UCITS schemes and non-UCITS retail schemes for liquidity management purposes and the regulator has confirmed that these should only be used for efficient portfolio management. It goes on to state that, if repo transactions are entered into for the sole purpose of liquidity management, it is unlikely that they will meet the requirements under applicable rules (COLL 5.4). 

Authorised fund managers (AFMs) should refer to paragraphs 32 to 33 of ESMA’s guidelines concerning the use of repos.

3. Client assets – Firms should refer to the FCA guidance on client assets (CASS) compliance published on 6 April 2020.

4. Paper-based and manual processes – The FCA expects AFMs not to prejudice the interests of certain unitholders versus others’. AFMs may allow unitholders or potential investors to deal in units in an authorised fund by post, fax or other physical means. Where dealing by one or all of these physical means ceases to be possible due to the coronavirus pandemic, AFMs should consider whether they can provide alternative means for unitholders to deal in units in the fund and how such alternative processes can be managed without disadvantaging unitholders. If AFMs cannot provide alternative means for unitholders to deal, and this results in the interests of some unitholders being prejudiced, AFMs should consider whether there are any other options for ensuring that all unitholders in the fund are treated fairly.

AFMs are also reminded of their duties and obligations to unitholders under the terms of the Prospectus and instrument constituting the fund, which are not derived from FCA rules.


ESMA publishes statement to mitigate impact on fund managers’ periodic reporting deadlines

Date: 09 April 2020

By Natalie Lim.

The statement relates to fund managers’ obligations to publish annual and half-yearly reports in respect of the funds they manage, specifically in relation to reporting period ending from 31 December 2019 to 30 April 2020 inclusive. In this context, fund managers include:

  • UCITS management companies
  • Self-managed UCITS investment companies
  • Authorised AIFMs
  • Non-EU AIFMs marketing AIFs pursuant to Article 42 of the AIFMD
  • EuVECA managers
  • EuSEF managers.

ESMA recognises that the actions taken by EU member states to prevent COVID-19 contagion present significant difficulties and challenges for fund managers and auditors in preparing their funds’ annual and half-yearly reports, carrying out timely audits, and publishing them within the reporting deadlines set out in the relevant Directives and Regulations.

While acknowledging the importance of periodic reports for timely and transparent disclosure, ESMA considers that the burdens on fund managers resulting from the COVID-19 outbreak should be taken into account by national competent authorities ('NCAs') in a co-ordinated way. ESMA expects NCAs to act in accordance with national rules applicable in their respective member states and, where possible, not to prioritise supervisory actions against market participants in respect of the upcoming deadlines set out in the regulations regarding:

  • Annual reports referring to a year-end occurring on or after 31 December 2019 but before 1 April 2020 for a period of two months following the relevant deadline
  • Annual reports referring to a year-end occurring on or after 1 April 2020 but before 1 May for a period of one month following the relevant deadline
  • Half-yearly reports of UCITS referring to a reporting period ending on or after 31 January 2020 but before 1 April 2020 for a period of one month following the deadline set out in the UCITS Directive.

NCAs are further encouraged to adopt a risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of the sectoral acts.

However, fund managers are reminded that certain funds continue to be subject to the disclosure obligations laid down in Article 17 of the Market Abuse Regulation (596/2014). Such funds must continue to disclose any inside information as soon as possible. 

ESMA will continue to closely monitor the situation and will take or recommend any measure necessary to mitigate the impact of COVID-19 timely and appropriate periodic disclosure by fund managers in respect of the funds they manage or market. ESMA will also, as necessary, reassess any potential need to amend the timelines the NCAs are expected to apply under the statement.

FCA sets out expectation for funds in light of COVID-19

Date: 7 April 2020

By Natalie Lim.

While acknowledging the significant challenge firms are facing in the current environment, the regulator has made clear that it expects firms to continue to uphold the best interest of their investors at all times.

On 6 April 2020, the FCA published a new webpage setting out its expectations for funds in light of the COVID-19 outbreak. The webpage focuses on key queries from firms and the FCA’s responses. 

In summary:

1. Delaying annual and half-yearly fund reports – the FCA has agreed for the publishing of annual and half-year fund reports to be delayed.

2. Virtual general meetings – The FCA has been asked whether firms can hold general meetings of fund unitholders virtually, and whether a unitholder could be considered to be present at the meeting if they are participating in or have joined a virtual meeting. The regulator recognises the operational challenges faced by firms in the current situation, and in that context, confirms it does not have a supervisory concern about meetings being held virtually. However, the FCA cautions that fund documentation may contain details about arrangements that are additional to what is prescribed by the FCA’s rules. The regulator cannot forbear on private law obligations owed by authorised fund managers (AFMs) to unitholders or claims which they might bring. AFMs are therefore reminded to consider the terms of their fund documentation, including prospectuses and instrument of incorporation, when making arrangements for meetings. 

3. Ensuring compliance with limits on value at risk (VaR) – The FCA understands some AFMs have experienced issues ensuring compliance with limits on VaR as part of their risk-limit systems. Firms are expected to already have plans in place to deal with such events and to take appropriate remediation action, considering market conditions and what is in the best interests of their customers.

Where individual firms continue to face issues managing their funds within risk limits generally, and VaR limits specifically, they should speak to their FCA supervisory contacts in the first instance or email firm.queries@fca.org.uk

4. Electronic signatures – The regulator is aware that some firms are struggling to obtain wet ink signatures on their application documents. During the COVID-19 crisis, the FCA is willing to accept electronic signatures on applications to authorise funds or approve changes to funds. Applicants may use electronic signatures where appropriate and relevant forms should be construed accordingly. Applicants may also validate accompanying documentation electronically, where possible. In all cases where an electronic signature is used, the FCA will need to be assured that the signatory has seen and agreed with all the information in the form.

COVID-19: fund reports and account deadlines extended

Date: 6 April

By Christopher Walker

The FCA has updated firms that it can confirm that annual and half-yearly fund reports as prescribed by COLL 4.5.7R and COLL 4.5.1R can be temporarily delayed.

This measure is aimed to ease an additional operational burden on fund managers and auditors alike during the coronavirus pandemic. The temporary relief, however, will not apply to requirements to produce half-yearly and annual reports in other countries and the FCA remarks that firms with concerns about their ability to comply with any such requirements should raise these with the relevant authority.

Extension periods

The following temporary extensions apply:

  • AFMs of UCITS and NURS will be permitted an additional two months to publish annual reports and should notify the FCA if they require use of this extension and take the steps set out on the webpage
  • for half-yearly reports, firms are permitted one month extra to publish and should again notify the FCA of their intention to use this extension and take the steps set out on the webpage.

Firms should remember their obligation under Principle 11 in relation to any issues of material concern. The FCA expects that AFMs will work 'closely with their depositaries' and that firms will ensure any decisions made are taken in light of good governance standards.

The extension policy is a temporary one and is intended to be in force for the duration of the disruption caused by the COVID-19 pandemic. The FCA will keep this under review as to ensure that the policy may be ended in a 'fair, orderly and transparent' fashion.

Next steps

AFMs seeking to make use of either optional extension period should:

  • 'promptly' inform the fund’s depositary and auditors
  • email the FCA with details of the funds this will apply to and the intended new date of publication.

AFMs should publish a 'prominent statement' on their website by no later than the original publishing date of the annual or half-yearly report. The prominent statement should explain the logic behind the AFM’s decision and state the revised publication date.

Firms are also encouraged to contact unitholders/investors in the funds they manage to explain the publishing delay, in particular considering other steps they could take to bring the deferred publication date to the attention of unitholders. The FCA emphasises that they do not envisage any change to the dates on which distributions are to be made for classes of units that distribute income.




Consistency is key: Investment Association publishes industry-wide ESG framework

18 November 2019

By Christopher Walker


Following its consultation earlier in the year, the Investment Association (the ‘IA’) published its ‘IA Responsible Investment Framework: Final Report’ (the ‘Report’) on 18 November. The purpose of the Responsible Investment Framework (the 'Framework') is to create a set of industry-endorsed definitions, applicable to all asset classes, of common approaches to responsible investment. This Framework can then serve as a tool with which firms may articulate their responsible investment approaches to clients.

The Framework itself, found at section 4.2 to the Report, outlines five separate components which are categorised according to whether they apply at the firm and/or fund level. The responsible investment components are as follows:

  • Stewardship
  • ESG Integration
  • Exclusion
  • Sustainability Focus
  • Impact Investing.

A definition for each of the components (together with explanatory notes and other guidance) is then included in an accompanying glossary to the Framework.

Next Steps

The IA encourages firms to adopt the Framework to help bring clarity and consistency to investors on the approaches they take to responsible investment. In January 2020, the IA will be asking firms to denote which of their funds should be tagged as having responsible investment components in accordance with the Framework. This will then allow the IA to publish statistics on funds with responsible investment characteristics later in 2020.

The Report also identifies a UK retail product label as a possible means of providing a shortcut for investors to understand whether an individual fund is adopting a responsible investment approach. According to the Report, there was broad support for such a proposal from respondents to the IA’s consultation. The IA will look to explore the possibility of a UK retail product label, amongst other issues, with a new Working Group in 2020.

EU Council adopts legislative reforms on sustainable finance and prudential requirements for investment firms

11 November 2019

By Alex Gillespie

EU directive

On 8 November, the EU Council announced that it had adopted legislative reforms in the following areas:

  • Sustainable finance: The Council has adopted two new regulations aimed at making finance greener and bringing it more in line with the objectives of the Paris agreement on climate change. The first reform introduces new disclosure obligations on how financial companies integrate ESG factors into their investment decisions. The second reform creates the following two new types of benchmarks aimed at giving greater information on an investment portfolio’s carbon footprint.
    • The EU Climate transition benchmarks – which focusses on lowering the carbon footprint of a standard investment portfolio.
    • The EU Paris-aligned benchmarks – which aims to include only those components that contribute to attaining the 2°C reduction set out in the Paris climate agreement.
  • Investment firms: A new directive and regulation has been adopted on the prudential requirements of investment firms. The legislative reforms are intended to adapt a firm’s prudential requirements according to its risk profile and business model whilst preserving financial stability so that the largest firms (that are considered systemic) will be subject to the full banking prudential regime and will be supervised as credit institutions, whilst smaller firms will be subject to a new bespoke prudential requirements regime.

For further details, a copy of the Council’s press release can be found here.

FCA publishes letter to Chairs of AFMs on effective liquidity management

5 November 2019

By Alex Gillespie

shutterstock_1298719387 investment 26 04 19

The FCA has published a letter from Nick Miller, Head of Asset Management at the FCA, to the Chairs of Authorised Fund Managers (AFMs) on good practice for effective liquidity managemen

ESMA publishes final report on integrating sustainability risks and factors in UCITS Directive and AIFMD

1 May 2019

By Alex Gillespie

Canary Wharf

On 30 April, ESMA published its technical advice to the European Commission on integrating sustainability risks and factors in the UCITS Directive and AIFMD. ESMA’s advice recommends changes to the UCITS and AIFMD level 2 legislation with respect to organisational requirements, operating conditions and risk management. In summary, ESMA recommends the following changes:

Organisational requirement - In an announcement released by the Commission the same day, the Commission explained that the main changes introduced by the rules will be to:

The proposed new rules will now be submitted to EU ambassadors for their endorsement and will require legal linguistic revision before the final text can be formally adopted by the Council and Parliament.

Asset Management Market Study – FCA issues policy statement on further remedies

5 February 2019

 City of London skyline

On 4 February 2019, the FCA issued its policy statement on further remedies as part of its Asset Management Market Study. Following industry feedback as part of its consultation last year, the FCA has concluded that will be largely proceeding on the basis on which it consulted, with only minor drafting amendments in a few areas.

The policy statement includes:

In addition, the FCA is clarifying how COBS 4 applies to the KIID (this change will come into force on 4 February 2019).

The new Handbook rules and guidance on benchmarks will come into force on 7 May 2019 for new funds on 7 August 2019 for existing funds. The FCA’s rules on performance fees will come into effect on 7 August 2019. The FCA reminds AFMs in the policy statement that 'We expect AFMs to take our guidance on fund objectives into consideration when reviewing fund documentation from the date of publication.'

By Alex Gillespie


On 26th February, the FCA published new Brexit guidance firms, including asset managers, operating in the UK wholesale markets. The guidance addresses the scenario of a no-deal Brexit, and the issues which UK firms doing business in the EEA will need to consider and the basis on which it may be possible for them to continue to provide their services after Brexit.

The guidance covers the following potential issues for UK firms in the event of no deal:

    A copy of the full speech given by Mr Randell can be found here.

    FCA issues policy statement on illiquid assets and open-ended funds

    1 October 2019

    By Christopher Walker


    Following its Consultation Paper (CP18/27) last October, the FCA issued its Policy Statement (PS19/24) on 20 September in relation to illiquid assets and open-ended funds.

    The FCA had previously paused the publication of the changes in light of the red A full copy of the Investment An to its requirements around the prediction of future performance and estimations of transaction costs.

    On 24 January, the European Pactus

    Financial Promotions

    Respondents have until 25 January 2019 to provide their comments to the FCA, with a policy statement then expected in early 2019. Further details regarding the consultation, including the consultation itself, can be found on the FCA’s website.

    How will the temporary permissions regime affect you?

    17 September 2018

    City tower buildings

    In this blog we consider the FCA’s website update from 24 July 2018 on how the temporary permissions regime will operate.

    ESMA and EU Regulators agree no-deal Brexit MoU with FCA

    4 February 2019


    1. Make it easier for EU alternative investment fund managers to test the appetite of potential professional investors in new markets (so-called ‘pre-marketing'). This will help them to take more informed commercial decisions before entering a new market.
    2. Clarify customer service obligations for asset managers in their host Member State. This should ensure that investors have access to a uniform, high level of customer service across the EU without imposing on asset managers the cost of maintaining a physical presence or local facilities in all host markets.
    3. Align procedures and conditions for managers of collective investment funds to exit national markets when they decide to terminate the offering or placement of their funds (so-called de-notification procedure).
    4. Introduce increased transparency and creation of a single online access point for information on national rules related to marketing requirements and applicable fees. This should help managers who want to increase their cross-border activities to save the cost of legal advice on national rules.
    5. non-Handbook guidance on how authorised fund managers (AFMs) should describe fund objectives and investment policies to make them more useful to investors
    6. rule changes to require AFMs to explain why their funds use particular benchmarks or, if they do not use a benchmark, how investors should assess the performance of a fund
    7. rule changes to require AFMs that use benchmarks to reference them consistently across the fund’s documents
    8. rule changes to require AFMs that present a fund’s past performance to do so against each benchmark used as a constraint on portfolio construction or as a performance target
    9. rule changes to require that where a performance fee is specified in the prospectus, it must be calculated on the basis of the scheme’s performance after the deduction of all other fees.
    10. Innovation and competiveness – The FCA wants an innovative and competitive asset management sector in which more intensive competition can benefit consumers and produce a range of new products to help meet their needs. The FCA must look hard at its regulation to ensure that there is an effective and forward looking system of regulation that focuses on the outcomes the industry achieves for households, businesses and governments as its ultimate clients.
    11. Requiring that the prospectus of the FIIA must include:
      • an explanation of the risks associated with the scheme investing in inherently illiquid assets and how these might crystallise
      • a description of the tools and arrangements the manager would propose using to mitigate these risks
      • an explanation of the circumstances in which these tools and arrangements would typically be deployed and the consequences for investors.
    12. Introducing a new rule that all FIIA financial promotions (other than the prospectus/NURS-KII) must include a new risk warning (which must be prominently placed in the promotion) that due to the illiquid nature of the fund’s underlying assets, the investor may experience significant delays and/or the need to accept a discount when redeeming their units.
    13. The FCA will be extending the date by which firms and funds should notify it for entry into the temporary permissions regime (TPR) to 30 January 2020. Fund managers will have until 15 January 2020 to inform the FCA if they want to make changes to their existing notification.
    14. brexit

      On 1 February, ESMA announced that it had agreed with EU Regulators and the FCA Memoranda of Understanding (MoUs) to protect the asset management industry in the event of a no-deal Brexit. The MoUs include a multilateral MoU between EU/EEA Regulators and the FCA covering 'supervisory cooperation, enforcement and information exchange between individual regulators and the FCA, and will allow them to share information relating to, amongst others, market surveillance, investment services and asset management activities. This, in turn, will allow certain activities, such as fund manager outsourcing and delegation, to continue to be carried out by UK based entities on behalf of counterparties based in the EEA.'

      A copy of the communication (PDF) is also available on the Commission’s website.

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