Regulated funds: updates for fund and asset managers

Important updates on fund regulation in the UK, including the latest FCA guidance, changes to the Handbook and upcoming developments in UK and European regulation

12 December 2019

Funds regulation in the UK

Welcome to our regulated funds blog, a practical guide to legal and regulatory developments in the UK authorised funds sector. The legal and regulatory framework governing UK authorised funds is constantly evolving. We keep track of legal and regulatory developments to help keep you informed as to what is happening – and what is coming down the line. Below you will find our regular round up. For further information please contact Tom Dunn or another member of our regulated funds team.

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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 management. The letter reminds AFMs of their central responsibility in ensuring effective liquidity management in the funds they manage (regardless of whether they have delegated investment management to another person).

In the letter, Mr Miller refers to the FCA’s recent policy statement (PS19/24) on illiquid assets and open-ended funds and says that, whilst the policy statement focused on non-UCITs retail schemes, 'firms should recognise that effective liquidity management is an irreducible, core function for all open-ended funds' (emphasis added). Whilst the new rules outlined in the policy statement do not come into force until September 2020, fund managers (and depositaries) may therefore wish to consider whether it would be in investors’ interests to adopt some of the measures ahead of this date where this would not conflict with the current rules.

Mr Miller asks AFMs to consider their obligations on portfolio composition, asset eligibility and liquidity management and to review their liquidity management arrangements against the FCA’s good practice outlined in the letter. This includes:

Portfolio Composition:

  • COLL 5.2.7AR outlines the criteria which transferable securities must fulfil to be an eligible asset for a UCITS (the criteria also apply for NURS per COLL 5.6.5AR).
  • COLL 5.2.3R requires that AFMs should ensure UCITS funds have a prudent spread of risk (COLL 5.6.3R for NURS) together with COLL 5.2.11R which includes specific provisions on spread for UCITS.
  • AFMs must at all times during a dealing day comply with their obligations to redeem units at the request of qualifying unitholders under COLL

In particular, AFMs are asked to consider the requirements under COLL 5.2.7AR including that the liquidity of a transferable security does not compromise their ability to redeem units in the fund. This, Mr Miller says, might include considering whether a security is, in practice, sufficiently liquid even where it is admitted to trading on an eligible market.

Liquidity Management:

AFMs are asked to review their arrangements against the FCA’s paper on 'Liquidity management for investment firms: good practice' and to improve them where necessary. Furthermore, AFMs should review their practices for liquidity management in authorised funds to ensure that they enable the AFM to meet their obligations to investors to have adequate liquidity in the funds they operate to meet redemption requests. The International Organization of Securities Commissions’ 2018 liquidity recommendations should be included into any such review and AFMs should consider the extent to which their arrangements are in line with these recommendations.


FCA statement on delay to UK’s exit from EU

31 October 2019

By Alex Gillespie


 Following the extension to the UK’s departure date from the EU, the FCA has released a short statement making the following points:

  • 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.
  • Implementation of Brexit plans can be delayed until exit date.
  • Firms should continue to comply with existing regulatory requirements, including those relating to MiFID transaction reporting and EMIR trade reporting requirements. The arrangements described in the FCA’s press release of 11 October are suspended and the FCA expects firms to continue to report as normal.

A copy of the full statement can be found here.


FCA publishes feedback statement on ‘Building a regulatory framework for effective stewardship’

25 October 2019

By Alex Gillespie

Canary Wharf

The FCA has published its feedback statement (FS19/7) in response to views it received as part of the its earlier discussion paper on ‘Building a Regulatory Framework for Stewardship' (DP 19/rliament updated its procedure files so that the new Directive and Regulations proposed by ECON will be considered in its plenary session of 15 to 18 April. For further information on the proposed changes, please refer to ECON’s reports on%2his paper, the FCA says that it has coordinated with the FRC in how it has framed ssociation’s guidance can be found on its website.

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:

  1. Organisational requirements – ESMA recommends that%2+REPORT+A8-2018-0430+0+DOC+PDF+V0//EN" target="_blank">Regulation. In an announcement released by the Commission the same day, the Commission explained that the main changes introduced by the rules will be to:
    • 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.
    • 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.
    • 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).
    • 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.

    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:

    • non-Handbook guidance on how authorised fund managers (AFMs) should describe fund objectives and investment policies to make them more useful to investors
    • 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
    • rule changes to require AFMs that use benchmarks to reference them consistently across the fund’s documents
    • 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
    • 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.

    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:

      • Outward passporting and the treatment of clients: When the UK leaves the EU, passporting rights will no longer apply and firms will need to consider how they will be able to continue to provide cross border services and take appropriate steps (such as by speaking with the relevant EEA regulators and/or applying for temporary permissions for certain jurisdictions). The FCA reiterates that it expects fair treatment of customers irrespective of where they are based and that in many cases it would be a poor outcome for clients to simply stop servicing them.
      • Access to financial market infrastructure: With EU withdrawal approaching, the FCA reminds firms to ensure that execution is managed appropriately and to discuss their future plans with the FCA (e.g. contingency plans and underlying assumptions), including in respect of market access models, operational models and execution arrangements. Firms are also expected to discuss how they will communicate to clients such changes and their impact. Specific guidance is given by the FCA in relation to (i) access to clearing and (ii) the ability of firms to trade on UK and EU trading venues following Brexit.
      • Continuing to meet threshold conditions: Firms are reminded that if they are expanding their presence into Europe, the structures they put in place must enable the FCA to supervise the conduct of their UK businesses effectively and ensure that they continue to meet the FCA’s thresrsquo;s announcement will be welcome news to the UK asset management industry and helps address industry fears over the loss of EU fund managers’ ability to delegate investment management functions to UK managers in the event of a no-deal Brexit.

        t label: A proposed voluntary UK product label designed to assist retail investors and their advisers to easily identify funds which have adopted a sustainable investment approach. The label would also draw attention to the sustainability and responsible investment expertise within the UK.

        ‘Stock-take’ of reporting frameworks: A review on reporting frameworks used by asset managers to disclose how they embed ESG considerations into their investment process, and the impact that their investments have had on wider sustainability indicators.

        Members of the Investment Association are invited to respond to the consultation by 1st March 2019.

        EU Parliament to consider proposals20response. Meanwhile, the upcoming extension of the Senior Manager’s Regime will help to make individuals accountable for the service that their firm’s deliver.

    • 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.

    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

    • 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.

    Financial Promotions

    • 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.

    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.<0uk’s departure="" date="" from="" the="" eu,="" the="" fca="" has="" released="" a="" short="" statement="" making="" the="" following="">

    • 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.
    • Implementation of Br

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

      4 February 2019


      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.'

      ESMA&326FD421381EBB42C86D8741E&_z=z" title="Read article">Securities Financing Transaction Regulation – The Final Provisions. A copy of the communication (PDF) is also available on the Commission’s website.

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