Funds Legal Update | 20 January 2020

FPC establishes principles for greater consistency between a fund's liquidity and its redemption terms

On 16 December 2019, the Bank of England (BoE) published issue 46 of its financial stability report, prepared by its Financial Policy Committee (FPC), which contains a section on vulnerabilities in open-ended funds.

The FPC judges that the mismatch between redemption terms and the liquidity of some funds' assets means there is an advantage to investors to redeem ahead of others, particularly in a stress situation. This has the potential to become a systemic risk. As part of the ongoing review by the BoE and FCA on open-ended funds, the FPC has established that there should be greater consistency between the liquidity of a fund's assets and its redemption terms and has set out principles to achieve this. According to the press release, the BoE and FCA will now consider how these principles can be implemented in a proportionate and effective manner. The FCA will use the conclusions of the review, which will be released in 2020, to inform the development of the FCA's rules for open-ended funds. Recognising the global nature of asset management, the conclusions could also be used by UK regulators in international work at the Financial Stability Board, the International Organization of Securities Commissions and with other competent authorities.

New AIMA guides published

AIMA has published two new guides on responsible investment: (1) ESG Considerations at Alternative Investment Management Firms; and (2) Responsible Investment Policies for Hedge Fund Firms.

Responsible investment is having a significant impact on the investment management industry. Investors are using environmental, social, and governance (ESG) factors to analyse the conduct of the firms to which they allocate, and those firms are in turn using ESG factors to analyse their investment portfolio. AIMA's paper contains 27 different ESG issues affecting the management companies of alternative investment management firms.

Similarly, Responsible Investment is becoming ever more common in the hedge fund industry. AIMA's second paper is designed to serve as a guide for those hedge fund firms that wish to create Responsible Investment policies.

Revised and strengthened UK Stewardship Code now in force

On 1 January 2020, the Financial Reporting Council's (FRC) substantial and ambitious revision to the UK Stewardship Code came into effect. The new 2020 Code significantly raises expectations for how money is invested on behalf of UK savers and pensioners. It establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. In particular, the focus of the Code has been extended to include asset owners, such as pension funds and insurance companies, and service providers as well as asset managers. The objective is to align the approach of the whole investment community in the interest of end-investors and beneficiaries.

Sustainability: New transparency and disclosure requirements

Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the Disclosure Regulation) entered into force on 29 December 2019. The main provisions apply from 10 March 2021.

The Disclosure Regulation imposes transparency and disclosure requirements on financial market participants and financial advisors concerning the integration of sustainability risks in the investment decision making and advisory processes. The new legislation will harmonise the divergent disclosure standards and market-based practices that currently exist across EU Member States, making it easier for end investors to effectively compare different financial products with respect to their ESG risks and sustainable investment objectives.

The Disclosure Regulation forms part of a package of reforms which aim to integrate ESG considerations into the investment and advisory process in a consistent manner across financial sectors. See our article on the proposed  EU Taxonomy Regulation. Following political agreement, we expect the Taxonomy Regulation to be formally adopted by the Council and European Parliament this year.

ESMA report values EU Alternative Investment Funds at €5.8 trillion

On 10 January 2020 ,the European Securities and Markets Authority (ESMA) published its second statistical report on EU Alternative Investment Funds (AIF). The study found that the EU AIF sector in 2018, as measured by Net Asset Value, amounted to €5.8tn or nearly 40% of the total EU fund industry. The report is based on data from 30,357 AIFs, which is almost 100% of the market.

FCA Policy development update

The FCA updated its policy development update on 10 January 2020, which sets out information on recent and future FCA publications.

What is in the pipeline for 2020?

• Q1 2020: The results of the EU Commission-led consumer testing exercise, which aims to assess the effectiveness of the different presentations of performance scenarios in the Key Information Document (KID), are expected to be ready in Q1 2020. These will inform the ESAs' final proposals for how performance information will be presented in the KID.
• 1 April 2020: two Delegated Regulations (here and here) will apply, amending existing requirements for AIF and UCITS depositaries when delegating their safekeeping functions to a third party.
• The full results of the European Commission's review of the AIFMD are expected in 2020, with a report on the functioning of the legislation due to be published.
• The FCA is expected to undertake further work on the MiFID II inducements and research rules under the Conduct of Business sourcebook in the FCA Handbook.

If you would like to discuss any of these developments, please get in touch with one of the experts listed below.