Funds Legal Update

We look at the long-awaited proposals for "AIFMD II", the revisions to the Alternative Investment Fund Managers Directive (AIFMD), which are currently targeted amendments rather than a wholesale transformation. The UK Financial Conduct Authority (FCA) has released final rules following its third consultation on the Investment Firms Prudential Regime (IFPR), ahead of the new regime going live on 1 January 2022.

We also consider a few developments in the environmental, social and governance (ESG) space: the draft regulatory technical standards (RTS) for the EU Sustainable Finance Disclosure Regulation (SFDR) are delayed again, this time till 1 January 2023, and the debate around regulation of ESG ratings providers continues with International Organization of Securities Commissions (IOSCO) releasing recommendations for regulators and firms.

Finally, the UK government is considering removing performance fees from the defined contribution (DC) pension charge cap, a move which would make it easier for DC pension schemes to invest in long-term, illiquid asset classes such as private equity and venture capital.

AIFMD II: proposal for amendments to the AIFMD and UCITS Directive

On 25 November 2021, the European Commission issued a proposal for a Directive to amend the AIFMD and the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. This is far from a complete overhaul – the amendments are targeted and relatively limited in scope.

The package of reforms includes measures relating to:

•  Tightening up the delegation rules – for example, the European Securities and Markets Authority (ESMA) will be notified where more risk or portfolio management is delegated to third country firms than is retained;
•   Liquidity risk management;
•  Additional regulatory and investor reporting;
•  Provision of depositary and custody services; and
•  Loan origination by alternative investment funds

The proposal will now be considered by the European Parliament and Council, which could result in further revisions. More changes could also be coming when amendments to the Level 2 measures are issued. 

AIFMD II is likely to take effect in 2024/2025 at the earliest. The proposals will not apply to fund managers authorised in the UK, and there is no sign yet that the UK will follow suit and make these changes to its domestic regime.

FCA releases its third policy statement on  the Investment Firms Prudential Regime

On 26 November 2021, the FCA published its third policy statement on the implementation of the IFPR (PS21/17). This revised prudential regime for FCA-authorised investment firms will come into force on 1 January 2022.

The regulator sets out details of feedback it received on its third IFPR consultation paper (CP21/26, published in August 2021), together with its approach to the issues raised. 

PS21/17 covers aspects of the IFPR including disclosure, own funds (excess drawings by partners and members), technical standards, depositaries, the UK resolution regime, enforcement, applications and notifications.

SFDR RTS delayed further to 1 January 2023

On 29 November 2021, ESMA published a letter from the European Commission on the regulatory technical standards under the EU Sustainable Finance Disclosure Regulation, announcing a further delay to the date of application.

In July 2021, the Commission announced that the SFDR RTS would be adopted in a single delegated act with an expected application date of 1 July 2022. 

The Commission now announces that:

•   The date of application of the SFDR RTS should be deferred until 1 January 2023. 
•   Firms required to publish the statements referred in Articles 4(1)(a), 4(3) or 4(4) of the SFDR will have to comply with the disclosure requirements on principal adverse impacts on sustainability matters in the RTS for the first time by 30 June 2023. This means that the first reference period under the RTS will be 1 January 2022 to 31 December 2022.

IOSCO makes recommendations around ESG ratings and data products providers

On 23 November 2021, the International Organization of Securities Commissions published its final report on ESG ratings and data products providers. 

The recommendations in the report include the following:

• Regulators could consider focusing more attention on the use of ESG ratings and data products and the activities of providers in their jurisdictions. 
• When issuing high quality ESG ratings and data products, providers could consider factors such as transparency, public data sources, defined methodologies, managing conflicts of interest, and how they handle confidential information.
• Users of ESG ratings and data products could consider conducting due diligence on the products they use as part of their internal processes.
•  Providers and firms which are assessed by them, could consider improving their communication, disclosures, information gathering processes.

The report also includes guidance to assist firms and regulators navigating the ESG ratings and data market.

UK government seeks to remove performance fees from the DC pension charge cap 

On 30 November 2021, the Department for Work & Pensions (DWP) launched a consultation on proposed changes to the charge cap that applies to defined contribution (DC) pension schemes. Feedback is due by 18 January 2022.

Specifically, the charge cap applies to the default funds of occupational DC pension schemes used for automatic enrolment. The government is considering options to amend the charge cap to accommodate performance-based fees. This would allow more flexibility for DC schemes to access a range of long-term, illiquid investment opportunities.