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.

17 September 2018

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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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.

On the same day, HM Treasury published draft legislation to establish the temporary permissions regime and the PRA also published a website statement on how the temporary permissions regime will operate.

The temporary permissions regime is being introduced to provide a 'backstop' if there is not a formal transition period and the passporting regime falls away when the UK leaves the EU.

In such circumstances the temporary permissions regime will allow EEA firms with inbound passports to continue operating in the UK for a limited period after 29 March 2019. It will also allow funds with a passport to continue temporary marketing in the UK.

As such it is important to note that the regime is intended to operate as a backstop, whereby it will only come into effect if required i.e. if there is no transition period and the current passporting regime falls away when the UK leaves the EU on 29 March 2019 at 23:00.

In these circumstances the regime aims to minimise disruption faced by EEA firms and UK businesses and consumers due to the loss of passporting rights arising from EU withdrawal and will ensure that firms can continue to carry out business as before, for a temporary period after exit day.

It will also mean that firms have appropriate time to prepare for and submit applications for UK authorisation and in the case of funds, UK recognition.

The FCA update covers which firms can use the regime, the additional requirements that will apply, how the regime will operate and the notification process. Firms in the regime will have Part 4A permission.


Securities financing transactions update

07 September 2018

Reflection of Stock Market Screen on window

It is over two years since the Securities Financing Transactions Regulation (SFTR) first came into effect. The obligation under the SFTR to report securities financing transactions (SFTs) to trade repositaries is, however, yet to apply pending the European Commission’s adoption of the relevant Regulatory Technical Standards (RTS). In an internal communication dated 23 July 2018, the Commission proposed the endorsement of draft RTS prepared by ESMA with limited revisions. The communication could lead to the RTS being finalised and adopted in a matter of weeks and the reporting obligation consequently coming into force next year.

Once the reporting obligation under the SFTR comes into effect, borrowers and lenders of assets, such as bonds, cash and stock will be required to make daily disclosures to a trade repository which includes all the requisite data points specified in the RTS. It is expected that the detailed nature of the reporting requirements will have cost implications for the asset management industry, which has increasingly employed securities lending as a method of seeking greater returns. The cost of compliance may be even greater where the counterpary is located outside the EU and is not subject to the same reporting obligations as the EU party.

Further details regarding the final form of the RTS and likely timescales for its adoption will likely be known in the coming weeks, once ESMA has issued a response to the Commission. For further details on the SFTR, please see our article: Securities Financing Transaction Regulation – The Final Provisions. A copy of the communication (PDF) is also available on the Commission’s website.



The PRIIPs Regulation: Key issues coming out of the FCA’s Call for Input

07 September 2018

London Financial District

Ever since the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs Regulation) came into effect at the start of the year, concerns have been raised that the prescribed contents for Key Information Documents (KIDs) could mislead investors. A PRIIP includes an investment product where the amount repayable to the retail investor is subject to fluctuations due to exposure to the performance of assets that are not directly purchased by the retail investor (and which can therefore include both regulated and unregulated investment funds).

Within weeks of its implementation, the Investment Association called for an “urgent early review” of the regulations and Andrew Bailey, head of the FCA publically stated that he also “had concerns about PRIIPs” and that further steps would be taken by the FCA. This was followed by the publication of the FCA’s Call for Input on 26 July which identifies the following three key issues with the contents of KIDs:

  1. Negative portfolio transaction costs: One common criticism from the industry has been that the rules around the calculation of portfolio transaction costs are confusing, with some managers reporting negative transaction costs due to slippage (put simply, the difference between the price when the trade is executed and when the order to trade is transmitted to the market). After investigating the issue, the FCA has said that while negative transaction costs are not necessarily inaccurate, when they reviewed the portfolios with negative transaction costs, they identified significant calculation errors by the managers which, when corrected, resulted in positive overall costs. The FCA has therefore not gone so far as to criticise the rules themselves, but has instead determined to rectify perceived industry confusion as to the interpretation of the rules.
  2. Risk disclosure: The FCA is aware of industry concerns that the methodologies used to calculate the summary risk indicators (SRIs) in the KIDs may be misleading to investors either because the risk of the product is not adequately captured by the SRI criteria or the product has significantly different SRI from other economically equivalent products. The SRI for real estate investment trusts, for example, may mislead investors as to the risks of investment since the SRI is calculated according to price volatility (meaning that products which trade infrequently may appear less risky than frequently traded products).
  3. Performance scenarios: One potential issue raised by the FCA involves the preparation of performance scenarios based on results from the previous five years for that product. Where returns over the previous five years are above or below the long-run average or what might be a reasonable expectation of future returns, the performance scenario shown in the KID might give an overly optimistic outcome for the product or vice versa. Initial criticisms about performance scenario’s misleading investors led the FCA to issue a statement in January about providing additional explanatory materials and/or providing additional explanations in the communications with clients.

A copy of the FCA’s Call for Input (PDF) can be found on the FCA's website. Respondents have until 28 September to provide their comments to the FCA. A feedback statement from the FCA is expected in early 2019.

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