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

15 November 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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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.

For further details on the FCA’s good practice for liquidity management, a copy of the letter can be found here.


FCA statement on delay to UK’s exit from EU

31 October 2019

By Alex Gillespie

Union jack and EU Flags

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 19/1).

The discussion paper was published jointly with the Financial Reporting Council (the FRC) and, in responding to the findings from this paper, the FCA says that it has coordinated with the FRC in how it has framed its future work. As part of this initiative to coordinate with the FRC, the FCA is seeking to strike a balance between setting a regulatory baseline for effective stewardship and promoting higher standards of stewardship through the FRC’s UK Stewardship Code (see our post ‘FRC publishes UK Stewardship Code 2020 for further information).

The FCA confirms that it will not be imposing further stewardship-related requirements on asset managers for now and that firms should be allowed to adapt to the FCA’s new rules on shareholder engagement (implementing the Shareholder Rights Directive (SRD II)). The FCA, has, however, identified the following things which it proposes to do to help address existing barriers to effective stewardship:

  • examining how asset owners set and communicate their stewardship objectives and taking actions to promote arrangements between asset owners, asset managers and service providers that support these objectives
  • helping to address regulatory, informational and structural barriers to effective stewardship practices, including by consulting on rule changes to enhance issuers’ climate change disclosures
  • considering further the role of firms’ culture, governance and leadership in both the management of climate risks and the exercise of stewardship
  • pursuing a number of actions to promote better disclosure of firms’ stewardship practices and outcomes.

The above actions build on earlier FCA initiatives, including from its recent feedback statement on climate change and green finance (FS 19/6) (see our post on the FCA’s publication of this feedback statement for further information).


FRC publishes UK Stewardship Code 2020

25 October 2019

By Alex Gillespie

shutterstock_264375761 Canary wharf at night 26 04 19

The Financial Reporting Council (the FRC) has published its UK Stewardship Code 2020 (the Code). The Code builds on and replaces the previous UK Stewardship Code 2012 and is due to come into effect from 1 January 2020.

Asset managers who sign up to the Code will be required to adhere to 12 stewardship principles (service providers such as investment consultants must adhere to six separate principles). All of the principles are then supported by reporting requirements which set out the information that signatories should include in their Stewardship Report. Organisations wanting to become signatories to the Code are required to produce an annual Stewardship Report which explains how they have applied the Code in the previous 12 months, which will then be assessed by the FRC. To be included in the first list of signatories, organisations must submit their report by 31 March 2021.

Asset manager signatories cannot delegate their responsibility and are accountable under the Code for effective stewardship. Stewardship activities for the purposes of the Code includes investment decision-making, monitoring assets and service providers, engaging with issuers and holding them to account on material issues, collaborating with others and exercising rights and responsibilities.

The FRC has collaborated with the FCA in relation to the appropriate interaction between the Code and regulatory requirements to encourage effective stewardship. For further details on the FCA’s approach to supporting effective stewardship, please see our post on its publication of the recent feedback statement. 

Further information on the FRC and the UK Stewardship Code can be found here.


FCA publishes feedback statement on Climate change and green finance

21 October 2019

By Alex Gillespie

London Financial District

The FCA has published its feedback statement on 'Climate change and green finance' (FS 19/6). The feedback statement responds to the FCA’s earlier discussion paper published in October 2018 and sets out the proposed actions of the FCA to enable firms to manage the risks from moving to a low carbon economy, support the development of the green finance market and ensure consumers are appropriately protected.

Key actions highlighted by the FCA in its feedback statement include:

  • consulting on new rules to improve climate-related disclosures by certain issuers and clarifying existing obligations
  • finalising rule changes requirieight: 100px; margin-top: -115px; visibility: hidden;">





    Feedback Statement 19/1 – a helpful reflection on PRIIPS and KIDs

    4 March 2019

    By Heather Musk

    insurance policies

    The FCA has published FS19/1 which sets out the next steps to be taken by the FCA as part of a European-level review of the PRIIPs legislation. It follows a call for input (CfI) that was issued in July 2018 on initial experiences of the PRIIPs regulation (Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation (Regulation (EU) No 1286/2014) and the related PRIIPs Regulatory Technical Standards (RTS) (Commission Delegated Regulation (EU) 2017/653)). The FCA received 103 responses from firms, trade bodies and consumer organisations to that CfI.

    The PRIIPs legislation requires those who produce, advise on or sell PRIIPs to retail investors in the EEA to produce standardised ‘key information documents (KIDs) on each product. In the feedback statement several issues have been identified relating to:

    • Lack of clarity on the scope of PRIIPs regulation
    • Summary Risk Indicators in KIDs delivering unexpected results
    • Methodology for performance scenarios producing misleading illustrations, and
    • Methodology for transaction costs producing misleading results.

    Lack of clarity on the scope of PRIIPs regulation

    PRIIPs for corporate bonds,  REITs (real estate investment trusts) and products manufactured or sold outside the EEA were identified as a key concern, as respondents were unclear as to whether the PRIIPs regulation applied to these investments.

    Summary Risk Indicators in KIDs delivering unexpected results

    Responses received to the CfI indicate that the Summary Risk Indicator has sometimes delivered lower risk ratings than expected where the underlying or reference asset is illiquid, which could mislead investors.

    Methodology for performance scenarios producing misleading illustrations

    It was noted in the feedback statement that ‘there was universal agreement in responses that the problems were caused by a reliance on past performance in the PRIIPs RTS methodology’. The FCA has said that it will ‘push for changes at EU level for a solution to the PRIIPs requirements that produce misleading performance scenarios’.  The FCA also provided that it will ‘consider the extent to which domestic interpretative guidance could mitigate this issue’.

    Methodology for transaction costs producing misleading results

    Responses to the CfI did not provide evidence to support claims that the methodology is not working as intended. The FCA has concluded that the ‘unrepresentative transaction costs in KIDs are a result of poor application of the PRIIPs methodology’.

    The FCA has identified in the feedback statement that the unintended effects of the requirements to comply with PRIIPs and the uncertainty of scope of products that need to comply with PRIIPs could cause consumer harm if not addressed. Further, it will ‘consider the extent to which domestic interpretive guidance from the FCA could mitigate these issues’. Of course the relationship between the EU and the UK will be of paramount importance for any changes that may take place in this space.

    If you have queries in relation to the content of this article please contact Tom Dunn or Heather Musk.






    FCA publishes Brexit guidance for participants in the UK wholesale markets (including asset managers)

    4 March 2019

    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 threshold conditions.

    For further information, please see the FCA’s guidance on its website.






    Impact of MiFID II regarding investment research

    4 March 2019

    By Heather Musk

    canary wharf

    Andrew Bailey delivered a speech on the impact of MiFID II regarding research provision at the European Independent Research Providers Association on 25 February 2019. He considered the effects of the unbundling of research following MiFID II. MiFID II requires brokers to price research separately from execution activities so that the cost of research is not influenced by, or conditional on, execution payments. Bailey concluded that overall the rules are ‘already having a positive impact’ citing that the FCA has seen ‘changes in behaviour which are starting to deliver the intended effects – reducing conflicts of interest, improving accountability and producing cost savings for investors’.

    The changes brought in by MiFID II for research are intended to increase accountability and seek to promote a competitive market for research. Since their introduction there has been a shift by the vast majority of traditional asset managers to fund research from their own revenues – instead of using their clients’ funds. Bailey spoke of the outcome of a multi-firm review conducted by the FCA since summer last year that indicates that the new rules are having a positive impact on the accountability and discipline of the buy-side when procuring research and on the cost of execution services. He also said that the FCA acknowledged the impact that economies of scale have and they will ‘continue to monitor developments through engagement with firms and trade bodies'.

    Bailey commented on how the FCA are completing their supervisory work to assess how the rules are bedding in, to analyse their impact on asset owners and consumers and on the market for research. He emphasised that the FCA have exercised flexibility in their rules where possible and they intend to be pragmatic about this.

    You can read a full transcript of the speech here:

    If we can help you with regarding any queries on the impact of MiFID II, or investment research then please contact Tom Dunn, Gareth Malna, Alex Gillespie or Heather Musk.




    ESMA consults on performance fee guidelines for UCITS

    17 July 2019

    By Alex Gillespie


    On 16 July, ESMA launched a public consultation on its draft guidelines on performance fees under the UCITS Directive. ESMA explains that the guidelines are aimed at harmonising the way in which performance fees can be charged to the UCITS and its investors and to ensure common standards of disclosure, since current practices vary across member states.

    The guidelines propose common criteria on the following areas:

    1. Performance fee calculat="_blank">CP19/7), on 31 May 2019, the FCA published its policy statement on improving shareholder engagement and increasing transparency around stewardship (PS19/13). Under the final rules, asset managers and life insurers must make disclosures about their engagement policies and investment strategies, including that:
      • Life insurers and asset managers must publish their engagement policy and annual information on how it has been implemented, or explain publicly why they are not doing sohere. %3ng Independent Governance Committees (IGCs) to oversee and report on firms’ environmental, social and governance (ESG) and stewardship policies, as well as separate rule changes to facilitate investment in patient capital opportunities
      • challenging firms where we see potential greenwashing, clarifying our expectations and taking appropriate action to prevent consumers being misled
      • contributing to several important collaborative initiatives, including the Climate Financial Risk Forum (CFRF), the Fair and Effective Markets Review (FEMR) working group, the government-led cross-regulator taskforce on disclosures and the European Commission’s Sustainable Finance Action Plan (SFAP).

      Further information on the feedback statement can be found here.


      Charles Randell delivers IA dinner speech on the future of the UK investment industry

      11 October 2019

      By Christopher Walker

       shutterstock_1298719387 investment 26 04 19

      Charles Randell, Chair of the FCA, delivered a speech at the annual Investment Association dinner on 10 October 2019 in relation to the future of the UK investment industry.

      Three key areas that Mr Randell highlighted as focal points for the future of UK regulation were:

      • Sustainable allocation of capital – one of the biggest expectations on today’s investment industry is allocating customers’ money wisely to investments that can add sustainable long-term value. This in part involves managing illiquidity and concentration risk in private markets (as demonstrated by the suspension of property funds in 2016 and the recent experience of the Woodford Equity Income Fund). It is a challenge to ensure that retail investors have a safe way of participating in such opportunities and have the right information and expectations about liquidity.
      • Fair returns to the providers of capital - the FCA’s Asset Management Market Study (the “AMMS”) found high levels of asset manager profitability but weak price competition (particular for active retail funds). As a result, the FCA has proposed remedies to help increase the value of UK authorised funds to consumers by improving cost and charges disclosures, strengthening fund governance with independent directors and requiring annual assessments of fund value. In addition to the AMMS, similar concerns have been found as part of the FCA’s unit-linked funds’ governance review where the FCA is currently its response. 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 Association’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.' 







        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’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.




        If you have queries in relation to the content of this article please contact Tom Dunn, or Heather Musk.



        Investment Association publishes industry guidance on benchmarks and performance

        8 May 2019

        By Alex Gillespie

        Stacks of Money

        The FCA’s policy statement on the Asset Management Market Study – further remedies (PS19/4) in February introduced new rules and guidance on fund objectives and the use of benchmarks. In response to these new rule changes and questions from the industry, the Investment Association has published guidance to help members comply with these new requirements. The new guidance covers the following areas:

        1. An overview of the new benchmark requirements, including what you need to achieve and when you need to achieve it by
        2. How to determine the correct level of engagement with the FCA and investors, including whether FCA approval is required and how to classify any changes under COLL
        3. Addressing industry questions around the benchmark definitions
        4. Answering industry questions around how benchmarks should be disclosed
        5. Guidance on the new rules for presenting past performance
        6. Answering additional questions around the Investment Association’s sectors (and whether they constitute benchmarks) and property funds (and whether they fall within the remit of the benchmark requirements).

        The guidance has been shared (but not approved) by the FCA.ment" width="1200" src="">

On Friday, ESMA published its updated Q&As on the application of the AIFMD to provide clarification on the calculation of leverage under the AIFMD. The updated Q&As clarify that:

  • The calculation of leverage exposure of an AIF resulting from a short-term interest rate future should not be adjusted for the duration of the future under either of the gross or commitment methods.
  • AIFMs should clarify the leverage of each AIF that it manages as often as is required to ensure that the AIF is capable of remaining in compliance with leverage limits at all times. Consequently, leverage should be calculated at least as often as the NAV is calculated, or more frequently if required (such as for material market movements or changes to portfolio composition).

A full copy of the updated ESMA Q&A can be found here.





The UK Benchmarks Register

28 March 2019

By Heather Musk

shutterstock_268734407 London skyline 07 15

The FCA published a web page on the 22 March 2019, announcing that it has developed a new UK Benchmarks Register (the 'Register'). This Register will replace the current ESMA Register for UK supervised users and UK and third-country based benchmark administrators that want their benchmarks to be used in the UK.

The Register is being introduced in preparedness for if the UK leaves the EU without an implementation period. The new Register will include benchmark administrators and third-country benchmarks.

Further details of the new UK Benchmarks Register can be found here.






The IA updates its guidance on the classification of change events

12 March 2019

By Alex Gillespie

stacks of money

On 1 March 2019, the Investment Association (‘IA’) announced that it had updated its guidance on the classification of change events for authorised funds. The purpose of the IA’s guidance is to help members determine how changes to authorised funds may be treated for the purposes of investor approval or notification under COLL 4.3 (and whether FCA approval or notification is required).

The guidance, which has been issued in draft subject to final approval from the Depositary and Trustee Association, has been updated to include four new categories of change, being:

  1. change of name of the AFM (but where the entity is continuing as AFM and the name of the scheme or sub-funds is not changing)
  2. change of name of umbrella fund (but where no changes are being made to the names of the sub-funds)
  3. introduction of wording in the prospectus to allow the AFM to make a mandatory conversion to a different unit class without unitholder instruction
  4. conversion of a unitholder’s or group of unitholders’ units to a different unit class without their instruction.

The final two change events (points 3 and 4) follow the recent FCA guidance in FG18/4 on moving investors from pre-RDR unit classes without their express instruction.

Further details of the IA’s classification guidance, including the recent changes outlined above, can be found on the IA website.






FCA publishes new materials on disclosure of costs by asset managers

4 March 2019

By Heather Musk

asset managers at night

The FCA has published a new web page setting out the findings of its multi-firm supervisory review on disclosure of costs by asset managers. The content provides clarity on what the FCA considers to be effective cost disclosures.

The review, conducted as a result of the Asset Management Market Study (MS15/2.3) which found there was weak price competition in the sector and initiated as an outcome of the occasional paper 32 published in April last year, took place in two work streams. The first work stream looked at transaction costs and how these are disclosed. The second was a desk-based review of the effectiveness and consistency of product cost disclosures across various information sources (including UCITS KIIDs, PRIIPs KIDs, factsheets and firm websites).

The FCA’s findings in relation to transaction costs were split out into the following key themes:

  • Incorrect application of the PRIIPs requirements by firms
  • Incorrect use of anti-dilution levies
  • Ineffective oversight of outsourced arrangements
  • Transaction costs in underlying funds disclosed under ‘other ongoing costs’ for UCITS products.

In relation to the effectiveness and consistency of cost disclosures work stream, the FCA made the following findings:

  • The impact of material portfolio transaction costs in UCITS is not reflected in KIIDs
  • Marketing communications for UCITS can provide information in addition to that specifically required by the KIID
  • Even when all costs are disclosed, they are still confusing
  • Some UCITS providers are still using unclear terms.

The key concern of the FCA is that firms are not giving consumers a clear account of how much they will pay when they invest in financial products and it wants firms to use a more holistic approach to disclosing costs to make sure they are fair%2/p>



The Investment Association launches ESG consultation

28 January 2019


On 25 January, the Investment Association launched an industry wide consultation on sustainability and responsible investment. The consultation seeks the views of asset managers and aims to bring greater clarity to investors navigating the ESG landscape.

The consultation seeks industry views on key components of the ESG debate, including:

'Agreed standard definitions: Proposed definitions for the different sustainable investment approaches, including commonly used terms such as: environmental, social and governance (ESG) integration, impact investing, and negative screening, with the aim of agreeing an industry-endorsed set of standard definitions.

Development of a UK product 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 proposals for the cross-distribution of collective investment funds in April

28 January 2019

Union jack and EU Flags

Back in December, the European Parliament’s Economic and Monetary Affairs Committee (ECON) announced that it had adopted drafts proposals from the European Commission for a new Directive and Regulation on the cross border distribution of collective investment funds. ECON subsequently published two reports outlining the proposed Directive and Regulation. The reports propose certain changes to the current UCITS and AIFMD Directives to 'further coordinate the conditions for fund managers operating in the internal market and facilitate cross-border distribution of the funds they manage', including outlining new rules and procedures to align the notification procedures under UCITS and the AIFMD.

Amongst the proposals outlined in ECONs reports is that the Regulation should amend the current PRIIPs Regulation to extend the exemption for UCITS funds from 31 December 2019 to 31 December 2021. The PRIIPs Regulation has been the subject of industry criticism, particularly in relation to its requirements around the prediction of future performance and estimations of transaction costs.

On 24 January, the European Parliament 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 the Directive and Regulation.







What is good culture in the investment management industry?

28 January 2019


We all know the impact that good culture can have on a business. However, in a speech by Andrew Bailey on the 6 November 2018 at the Investment Association Culture Conference, it would appear that, further to the FCA’s discussion paper on Transforming Culture in Financial Services and the follow up conference, the FCA is looking to bring into focus the importance of culture. In his speech Bailey positioned how good trust and enabling good culture are intrinsically linked.

The focus of Bailey’s speech was on honouring the trust that retail investors put in the investment management industry. The responsibility that comes with trust was another point that was considered, with Bailey describing that it is reasonable that retail investors will want to put their trust in experts who can assist with decisions on saving and investment, which brings into play the culture and behaviour of those in whom trust is placed. In Bailey’s view the 'stakes are high'.

Bailey, referred back to the Asset Management Market Study and discussed some of the broader issues it raised, and how these can affect culture and trust. In particular:

  1. Transparency around fees and charges;
  2. The effectiveness of communication with investors (being, in Bailey’s view 'a test of culture'); and
  3. A tendency toward complacency or a 'lack of curiosity' as to how a firm can challenge itself and improve.

The FCA also hosted a webinar on ‘Creating a Speak up, Listen up culture in financial services’ on 23 November 2018.

Expectations seem to be mounting in this area for the asset management industry. We’ll keep you up to date on the regulator’s view of what good culture looks like as things progress.







European Commission reports on the success of AIFMD

11 January 2019

EU flags floating in Brussels

On 10 January, the European Commission published its report on the operation of the Alternative Investment Fund Managers Directive or ('AIFMD'). Based on responses provided by stakeholders most affected by the AIFMD, the report assesses how the AIFMD has worked in practice over the seven years since it came into effect and the extent to which it has met its objectives.

The report generally concludes that the AIFMD has played a major role in helping to create an internal market for AIFs as well as a harmonised and stringent regulatory and supervisory framework for AIFMs. However, it also identifies a number of aims which have not been met and suggests where further improvements may be required. These include:

  • concerns in relation to the data which must be reported as part of the AIFMD reporting requirements
  • binary valuation rules impacting their effectiveness for certain asset classes
  • different interpretations between Member States regarding the depositary rules
  • excessive disclosure requirements to investors.

The report further acknowledges that the EU marketing passport regime under the AIFMD is lagging behind on its implementation due to different approaches taken by Member States.

The report does, however, acknowledge that there may be hidden risks affecting the system as a whole (such as new financial instruments where the embedded risk cannot yet be assessed), which may have yet to materialise since the AIFMD has yet to be fully tested.

The review of the AIFMD is a requirement under the AIFMD itself and the Commission is required to analyse the report and propose appropriate amendments to the AIFMD based on its findings. The Commission will continue its work on the AIFMD, focusing on the specific issues identified in the report and is expected to report to co-legislators later in 2019.







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.


  • 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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