Funds Legal Update | 25 September 2020

The FCA has praised the UK asset management sector as "a true national asset", but is keen to emphasise the importance of purpose and governance as drivers of firm culture in this sector. In this edition, we highlight the main features of firms that "get it right" in the eyes of the FCA.

Looking towards Europe, the Regulation on European long-term investment funds (ELTIFs) has not had the market reception the European Commission was expecting and we ask why the uptake has been so low? The European supervisory authorities (ESAs) have advanced proposals to standardise disclosures under the Disclosure Regulation using templates to promote sustainability characteristics – you can have your say in their online survey. Continuing on that theme, the Financial Markets Law Committee has been critical of the divergence of sustainability-related disclosure requirements across Europe, leading to much uncertainty in relation to cross-border investment.

Finally, the temporary relief afforded to funds in respect of the publication of their reports and accounts is coming to an end. Make sure you are on top of the relevant deadlines.

Dates for the diary

• 30 September 2020: FCA rules on illiquid assets and open-ended funds enter into force.
• 30 September 2020: The European Securities and Markets Authority guidelines on liquidity stress testing in UCITS (undertakings for collective investment in transferable securities) and alternative investment funds start to apply.
• 1 October 2020: FCA consultation on open-ended investment companies and proposals for a more proportionate listing regime closes to comments.
• 14 October 2020: Commission's inception impact assessment on review of the Regulation on European long-term investment funds closes to feedback.
• 3 November 2020: FCA consultation on liquidity mismatch in authorised open-ended property funds closes for comment.

On 18 September 2020, the UK regulatory authorities published an updated version of the Financial Services Regulatory Initiatives Grid (which now covers a two-year horizon). This flags that the joint Bank of England/FCA survey into open-ended funds has been delayed until further notice, which will also impact the FCA consultation that would have followed.

EU knocking down barriers to long-term investment

The EU is suffering from a chronic lack of long-term financing for small and medium-sized enterprises. The Regulation on ELTIFs was designed to promote investment into companies and long-term investment projects, but uptake has been slow and very few have been launched. But why?
To recap, ELTIF is a pan-European framework for AIFs that invest in longer term real economy investments such as infrastructural projects, real estate, listed and unlisted SMEs. The ELTIF regime is intended to facilitate investment in these assets by pension funds, insurance companies, professional and retail investors providing an alternative non-banking source of finance.

The Commission has issued an inception impact assessment examining the following issues raised by stakeholders:

• Removing limitations on the supply side. This would be done by improving the fund structuring and eligible assets related aspects of the ELTIF framework. The proposal includes modifying borrowing limits and targeted amendments to improve the attractiveness of the ELTIF regime for institutional investors that will assist them in meeting conditions around investment strategy, governance, investor base and oversight.
• Reducing the demand side barriers to investment. The main focus is on aligning national measures related to the retail passport for ELTIFs by reducing national discretions, clarifying the ELTIF requirements for the assessment of retail investor's knowledge and experience, introducing more flexibility for investors to redeem their investment "at a mid-point" or more frequent redemptions optionality.
• Introducing incentives by Member States to promote ELTIF investment. This will not include tax relief which is outside the scope of the Commission's mandate.

The assessment closes to feedback on 14 October 2020.

FCA focuses on purpose and governance in the asset management sector

Earlier this month the UK financial regulator heralded the UK’s asset management industry as "a genuine and widely acknowledged success story". With almost £10trn in assets under management, and a trailblazer in areas such as environmental, social and corporate governance (ESG) and stewardship (not to mention the contribution the sector makes to UK jobs, tax revenue and financial stability), it is clear to see why the FCA regards the sector as a "true national asset".

But with such success comes great responsibility. On 21 September 2020, the regulator published a speech by Marc Teasdale, Director of Wholesale Supervision, emphasising the importance of the drivers of culture and the role of purpose and governance in the asset management sector.

In light of this speech, the asset management industry should be focussing on the following five points:

1. Business model: When the FCA talks about purpose, it is referring to the combination of a firm’s economic function or business model, and the way in which it thinks about the social or economic contribution it provides.
2. Governance structures: The FCA considers governance as critical to the success of firms in delivering long-term returns for investors. This does not just mean the formal governance at the Board or most senior levels, but constitutes a broader set of processes, systems, controls and arrangements by which decisions are made and business gets done.
3. Management of conflicts: The FCA views the effective identification and management of conflicts of interest as an expression of purpose for asset managers. Often insufficient consideration is given to the conflicts being further embedded within the typical group structure through heavily over-lapping authorised fund managers (AFM) and investment manager boards, or the appointment of AFM board members with group roles and reporting lines that give them a direct interest in the revenue or profitability of the delegated investment manager.
4. Diversity and inclusion: The FCA emphasises the importance of diversity and inclusion for both governance and purpose. Firms are asked how far diversity and inclusion has progressed from a discussion about staff to a discussion about customers, and how far purpose is viewed in this way.
5. Not a 'tick box' exercise: Firms should view this value assessment as an exercise in purpose, rather than simply regulatory compliance. Firms should explain clearly to their staff and customers about the value its basic business proposition provides, and then put real rigour into assessing the extent to which it actually delivers that value. Where there is mismatch, the FCA expects firms to take action to improve the proposition they are offering to their customers.

Europe's supervisory authorities survey on ESG templates

On 21 September 2020, the ESAs published a consultation package on presentational aspects of product templates under Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services (the Disclosure Regulation), with a view to standardising disclosures.

The consultation package includes:

• Three preliminary, illustrative mock-ups of pre-contractual and periodic disclosure templates of products promoting environmental and social characteristics (under Article 8 and Article 11 of the Disclosure Regulation) by financial market participants, including alternative investment fund managers, UCITS management companies, insurance undertakings, institutions for occupational retirement provision, and pan-European personal pension product providers.
• An online survey. The ESAs note that the final content of the templates is subject to the outcome of a concurrent consumer testing exercise and their final report on draft regulatory technical standards under the Disclosure Regulation.

The survey closes to comments on 16 October 2020.

FMLC urges alignment of sustainability disclosures

The Financial Markets Law Committee (FMLC) has published (2 September 2020) its response to the ESAs joint consultation paper (22 April 2020) dealing with proposed regulatory technical standards under the Disclosure Regulation.

The international standards on sustainability-related disclosure requirements are not aligned or convergent, which creates uncertainty in relation to reporting obligations vis-à-vis cross-border investment activities. There is also divergence across EU law in relation to disclosure obligations set out under the Disclosure Regulation, the Non-Financial Reporting Directive and the Taxonomy Regulation. Accordingly, there is a risk that a new mandatory disclosure under the Disclosure Regulation will cause further confusion and overlap.

The FMLC urges the ESAs to ensure that the standards are aligned closely to the objectives set out in the Disclosure Regulation. In the future, when EU legislation in this area is reviewed, the FMLC states that it would be beneficial for the objectives and requirements imposed on financial markets participants by each piece of legislation to be aligned with the others.

Revised deadlines for publishing fund reports and accounts

Now that businesses have had time to adjust to the new environment, the FCA has updated its webpage to confirm that it intends to end the temporary relief in respect of the publication of annual and half-yearly fund reports and accounts. This will be done in stages over the coming months, as detailed on the webpage.