Funds Legal Update | July 2022

We take a look at the latest environmental, social and governance (ESG) developments, plus other updates from the UK and EU, including: the new Financial Services and Markets Bill 2022-23, clarity from the European Securities and Markets Authority (ESMA) on the responsibility for marketing communications, and updated advice for firms in the temporary permissions regime and the temporary marketing permissions regime.

ESG developments  

SFDR Regulatory Technical Standards published as a Regulation

On 25 July 2022, the Regulatory Technical Standards (RTS), which accompany the EU's Sustainable Finance Disclosure Regulation (SFDR), were published as a Regulation in the Official Journal of the European Union. The technical standards provide additional detail on the content, methodology and presentation of certain existing disclosure requirements under the SFDR and the Taxonomy Regulation. They will apply from 1 January 2023.

The Regulation is based on the draft RTS submitted to the Commission by the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority in April 2022. 

FCA delays its consultation on Sustainability Disclosure Requirements 

The Financial Conduct Authority (FCA) has delayed its consultation into the UK's Sustainability Disclosure Requirements (SDR) until the autumn. This proposed legislation has been dubbed as the "UK's answer to the EU's SFDR".

The UK financial regulator said it wanted to "take account of other international policy initiatives and ensure stakeholder have time to consider these issues".

The FCA did not give any indication on which international policy initiatives or stakeholders were the drivers behind the decision to postpone the consultation. However, with the next reporting milestones under the EU's SFDR on the horizon and the detailed Regulatory Technical Standards due to apply from January 2023, the FCA will be interested to see how the fund industry and EU regulators interpret these new standards.

Taxonomy Complementary Climate Delegated Act on gas and nuclear activities 

The European Commission has published the Complementary Delegated Act under the EU Taxonomy Regulation in the Official Journal of the EU.

The Complementary Delegated Act, which will apply from 1 January 2023, sets out the conditions under which nuclear and natural gas energy activities can be included in the list of economic activities covered by the EU Taxonomy Regulation. An EU-wide taxonomy of environmentally sustainable activities, the Taxonomy Regulation also introduces  disclosure requirements for certain financial services firms and large public interest entities. The conditions for inclusion of natural gas and nuclear activities include:

• That they contribute to the transition to climate neutrality.
• For nuclear, that it fulfils nuclear and environmental safety requirements.
• For natural gas, that it contributes to the transition from coal to renewables

The Act also amends Commission Delegated Regulation (EU) 2021/2178 supplementing article 8 of the Taxonomy Regulation to require large, listed non-financial and financial companies to disclose the proportion of their activities linked to natural gas and nuclear energy.

FCA provides information about online climate scenario analysis narrative tool

Last month, the FCA updated its webpage on the Climate Financial Risk Forum by adding information about an online climate scenario analysis narrative tool. This has been developed primarily to support smaller firms when they are assessing their climate-related risks and opportunities.

The tool is able to generate an institutional report (which delivers a report tailored to a particular firm) and a sector report (which allows users to see the content for an individual sector). It summarises the relevant climate-related risks and opportunities for banks, insurers and asset managers based on the business activities, products or risks of the firm, and the materiality of different lending exposure types, underwriting classes, asset classes and economic sectors for the firm. It may also be of interest to other institutions such as pension schemes, as well as firms with operations outside the UK.

The information in the tool has been written by the industry for the industry (and does not constitute regulatory guidance).

Other updates

Financial services and Markets Bill: a landmark piece of legislation

On 20 July, the UK government introduced its Financial Services and Markets Bill to Parliament, together with Explanatory Notes. With an increased focus on competitiveness and economic growth, this legislation is fundamental for delivering the UK government's plans for its regulatory framework post-Brexit.

Among other things, it provides for the revocation of all retained EU law relating to financial services set out in Schedule 1 (including rules implementing the Alternative Investment Fund Managers Directive  (AIFMD), Markets in Financial Instruments Regulation   and the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive in the UK). However, the revocation of a given law will not happen until there is appropriate domestic law ready to replace it. The Bill also introduces a new "regulatory gateway" through which authorised firms must pass before they are able to approve the financial promotions of unauthorised firms.

The Bill will be discussed in Parliament from September and could obtain Royal Assent in spring 2023.

In conjunction with the Bill, HM Treasury has also published its first annual report on the attractiveness and international competitiveness of UK financial services. The report:

• Identifies investment management as representing a significant part of the UK’s finance ecosystem, with £1.6 trn  worth of assets in UK-domiciled funds (although fund domiciliation is more prominent in the US (£22.4 trn), Luxembourg (£4.7 trn) and Ireland (£3.1 trn)). 
• Records strong growth in UK private equity (PE) and venture capital (VC) investment activity, with UK financial services firms securing £37.5bn in PE and VC funding in 2021. Representing a 48% year-on-year growth, this was more funding than businesses secured in Singapore (£7.7bn), Germany (£5.8bn), and France (£5bn), but less than in the US (£111bn).
• Identifies the UK as the second largest market (after the US) for PE and VC investment in clean and climate tech. 

According to the report, the government sees strength and further opportunity in further reform and innovation for fund structure offering in the UK, with one specific opportunity being the listing of alternative funds in line with Singapore’s offering.

Third-party distributors: responsibility for marketing communications

On 20 July 2022, ESMA published an updated version of its Q&As on the application of the AIFMD.

In particular, ESMA addresses the question of who is responsible for ensuring that marketing communications comply with the requirements set out in article 4(1) of the Cross-Border Distribution of Funds (CBDF) Regulation ((EU) 2019/1156) where the marketing of an alternative investment fund is not performed by the manager but by a third-party distributor. It also considers whether the answer would be different where there is a contractual relationship between the manager and the third-party distributor.

ESMA has confirmed that fund managers are responsible for the compliance with article 4 of the CBDF Regulation, irrespective of who is the actual entity marketing the fund, and of the relationship it has with the third-party distributor (whether it is contractual or not).

FCA updates webpage on firms and fund operators in the TPR and TMPR

On 14 July 2022, the FCA updated its webpage that summarises the rules that apply to firms in the temporary permissions regime (TPR) and fund operators in the temporary marketing permissions regime (TMPR).

The FCA has added a new section on disclosure requirements for EEA UCITS in which it advises that:

• In the UK, the exemption from the requirement for  European Economic Area (EEA) UCITS to produce a packaged retail investment and insurance products (PRIIPs) key information document  lasts until 31 December 2026. The UK regulator  can confirm that this exemption applies to both EEA UCITS recognised under section 272 of the Financial Services Market Act (FSMA) and those recognised under the TMPR. This means that, when being marketed to retail investors in the UK, EEA UCITS that are recognised under either section 272 of the FSMA or the TMPR must produce a UCITS key investor information document.
• The TMPR is due to end on 31 December 2025. The FCA is engaging with HM Treasury on the disclosure requirements that would apply in the event of an equivalence decision under the UK overseas funds regime.

PRIIPs disclosure dates postponed

On 14 July 2022, the Commission Delegated Regulation (EU) 2022/975 came into effect. This Regulation:

• extends transitional arrangements concerning the ability to use UCITS key investor information (to provide specific information for the purposes of disclosures relating to PRIIPs offering a range of options for investment until 31 December 2022 (instead of 30 June 2022); and
• postpones the application date of certain PRIIPs-related disclosures to 1 January 2023, instead of 1 July 2022