Funds Legal Update | 2 March 2020

DAC6: Are you prepared for the new mandatory reporting regime?

The EU Directive 2018/822 (DAC 6) introduces a new tax reporting regime in the UK from 1 July 2020. DAC 6 applies to EU intermediaries (including tax advisers, lawyers, corporate service providers and asset managers) who design, market, organise or make available for implementation or manage the implementation of a reportable cross-border arrangement. If there is no intermediary involved who is resident in an EU Member State, then the taxpayers themselves must report.

The arrangements are reportable if they fall within certain hallmarks. These hallmarks are very broadly defined and will, for example, capture a wide range of transactions within the asset management industry. It is not limited to aggressive tax planning – in a number of circumstances, no tax advantage is even needed from the arrangement. If disclosure is required, a substantial amount of information must be provided including the identities of all participants and advisers, and a summary of the arrangement, including an explanation of why it is caught. These rules will come into force regardless of the Brexit process.

ESG: More than just a temporary tick box

A report published at the beginning of February by a collaboration of industry partners – including the Alternative Investment Management Association (AIMA), CAIA, CREATE-Research and KPMG – has found that 59% of hedge fund managers are either at the ‘mature’ or ‘in progress’ stage of implementing ESG via appropriate policies, committees, research and data. The results support AIMA's long held view that policy and regulatory decisions around ESG adoption should be investor-led.

The survey identifies that investor demand is the key driver for 85% of managers in adopting ESG principles into their investment process. However, whilst significant progress is being made, AIMA notes that the scale of adoption remains hampered by the availability of good quality data for managers to assess ESG risk factors. For this reason, AIMA’s policy principles call for a regulatory framework that must encompass adequate disclosures from corporate issuers.

We discuss in more detail how ESG considerations are shaping the investment funds regulatory landscape, and other recent and upcoming developments of note, in the latest edition of our Regulatory Outlook.

FCA publishes its latest Sector Views

The FCA has published its annual ‘Sector Views’, an assessment of the risks and potential harm to consumers across the seven financial services markets, covering retail banking, retail lending, insurance, pensions, retail investments, investment management and the wholesale financial markets. The FCA outlines how each financial sector is performing, how the financial environment is changing and the impact of these changes on consumers and market effectiveness. This analysis will also contribute to the FCA’s Business Plan 2020/21, which will be published in the spring.

In relation to asset management, the FCA reports that climate change is having a considerable impact on the financial services markets as investors seek green products and there is increasing global attention on what the industry’s role should be in combatting it. Fund liquidity also remains a key focus, with concerns over how sudden spikes in redemptions in funds with less liquid assets are managed. Change in the sector is also being driven by increased outsourcing to third parties and the expanded use of artificial intelligence and algorithmic decision-making across more of the asset management business.

Cayman Islands and the EU list of non-cooperative tax jurisdictions

On 18 February 2020, the ECOFIN committee of the EU resolved to move the Cayman Islands to the EU's Annex I list of non-cooperative jurisdictions for tax purposes. The Cayman Islands government statement, in response, maintains that:

• the jurisdiction passed the necessary investment funds legislation on 31 January 2020 which came into force on 7 February 2020 (see below);
• the Cayman Islands has been fully cooperative with the EU's requests; and
• the Cayman Islands remains fully committed to cooperating with the EU and will continue to constructively engage with the EU with the view to being delisted as soon as possible (which could be October 2020).

The inclusion of the Cayman Islands on the list has limited immediate direct consequences to the fund industry or otherwise as the EU has not developed comprehensive sanctions or regulatory interventions, although individual Member States may have a range of actions under their domestic laws.

New investment fund laws published in the Cayman Islands

On 7 February 2020 the Cayman Islands Government published two laws:

• the Mutual Funds (Amendment) Law, 2020 providing for the registration of mutual funds that were previously exempted from registration under section 4(4) of the Mutual Funds Law (2020 Revision) with the Cayman Islands Monetary Authority ("CIMA"); and
• the Private Funds Law, 2020 providing for the registration of various closed-ended fund vehicles (termed "private funds") with CIMA. On 20 February 2020 CIMA issued a notice on the process for submitting registration applications for private funds prior to 1 March 2020.

Rules to improve firms’ approach to open-ended funds investing in illiquid assets

Following the referendum on EU withdrawal and the associated suspension of some property funds, the FCA consulted on a package of measures to improve the rules on open-ended funds invested in illiquid assets. The FCA published these in September 2019.

The new Handbook rules and guidance will come into force on 30 September 2020, to allow firms to use scheduled annual reviews of fund documentation to make the necessary changes. The FCA advises that fund managers and depositaries may wish to consider whether it would be in customers’ interests to adopt some of the measures, such as increased disclosure and improved liquidity management, ahead of the coming into force date, where these do not conflict with the rules applicable until that date.