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.

06 November 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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The FCA consults on illiquid assets and open-ended funds

6 November 2018

London Financial District

The FCA recently published its consultation on illiquid assets and open-ended funds (CP 18/27) following its discussion paper from February 2017.

Open-ended funds investing in inherently liquidated assets (referred to in the consultation as 'FIIAs') present a challenge for fund managers since the illiquid nature of the FIIA’s underlying assets may inhibit the manager’s ability to raise cash quickly to meet redemption requests, particularly in stressed market conditions such as those following the result of the UK’s referendum on EU membership in June 2016.

The FCA has proposed a package of measures in the consultation which are designed to:

  • reduce the risk of some investors being adversely impacted by the inaccurate valuation of units in FIIAs
  • improve the liquidity management of FIIAs
  • improve the disclosure of such liquidity risks to investors and how such risks will be addressed by the fund manager.

Key highlights from the FCA’s package of measures include:

Suspension of dealings in units

  • Introducing a new rule requiring a manager to temporarily suspend dealing in units where an independent valuer has expressed material uncertainty about the value of immovables representing at least 20 per cent of the value of the scheme property.
  • Giving specific guidance clarifying the circumstances in which it may be appropriate for a manager to suspend dealing where it is in the best interests of the unitholders to do so (for example where redemption demand cannot be met without significantly depleting the scheme’s liquidity or without selling off scheme property at a substantial discount).

Contingency plans

  • Introducing a new obligation on managers operating FIIAs to maintain contingency plans for dealing with liquidity risks which cover, among other things, the procedures the manager has in place with the depositary and relevant third parties to implement its liquidity management tools and arrangements.

Valuation

  • New guidance on how managers should arrive at a fair and reasonable value for immovables where they need to be sold quickly to meet redemption requests.

Investment and borrowing powers

  • Clarifying, by way of guidance, that cash and near cash should not be accumulated or held for a significant duration in anticipation of unusually high and unpredictable volumes of redemption requests.

Naming requirements

  • Introducing a new rule that managers of FIIAs should include the following identifier – 'a fund investing in inherently illiquid assets' – in the final part of the fund’s name at least once in any communication with retail clients.

Disclosure in the prospectus

  • 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.

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.

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