International Funds Legal Update | 28 March 2024

Rules regulating which statements to use when promoting unregulated collective investment schemes have lasted less than two months, after having unexpectedly been changed, enabling a wider distribution of funds. The EU has changed its rules governing asset management (which was expected), while the UK's "host AIFM" model comes under scrutiny.

New statements for HNWI and self-certified sophisticated investors (again)

As highlighted in our recent International Funds Legal Update, on 31 January 2024 HM Treasury changed the required statements for high net worth individuals (HNWI) and self-certified sophisticated investors. In an unusual U-turn, HM Treasury has now effectively reversed this, quickly amending the legislation again.

Firms will need to use the newest statements from 27 March 2024. Statements signed based on the "31 January 2024" editions remain valid until 30 January 2025.

The effect of the amendments is, broadly, to reinstate the financial thresholds to be eligible for the HNWI exemption, and the criteria to be eligible for the self-certified sophisticated investor exemption, to what was in place before 31 January 2024.

Both changes amend the exemptions from the restriction on communicating financial promotions set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and make the same changes to the equivalent exemptions in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.

The Financial Conduct Authority (FCA) has published a statement in relation to the amendments. The FCA seems dissatisfied with the government's U-turn, stating that the UK’s definition of a high net worth investor is an international outlier, with a "far lower threshold than comparable jurisdictions" and expresses a desire for a higher bar to qualify as a sophisticated investor.

FCA considers the 'host AIFM' model

The FCA has set out its findings from a 2023 review of "host AIFMs", where alternative investment fund managers (AIFMs) use a host model, sometimes to employ staff on secondment from a third party to help manage alternative investment funds (AIFs).

In this model, seconded staff help the AIFM to carry out regulated tasks, such as portfolio management of the AIF's assets or administrative jobs. The AIFM may be a principal firm and the person seconded to the AIFM may come from one of its appointed representatives.

The FCA's review assessed how well firms using the host model understood and complied with their regulatory responsibilities, focusing on situations where secondees from an appointed representative were placed with an AIFM principal firm.

The regulator has found a lack of oversight of seconded staff, insufficient involvement in investor due diligence, and inadequacies in capital adequacy calculations. It also found misleading claims from third parties that had seconded staff to an AIFM.

The FCA has provided guidance for firms operating the AIFM host model, but is also considering potential policy changes.

Investment Association report on asset managers' climate-related disclosures

The Investment Association (IA) has published a report on insights and suggested actions for asset managers following the commencement of reporting obligations of climate-related disclosures under the ESG sourcebook.

It focuses on key themes emerging from the first round of asset manager reporting, which saw large asset managers report in line with the Financial Stability Board's Taskforce on Climate-related Financial Disclosures recommendations and make disclosures at entity and product level.

Issues have been pinpointed in entity-level reports, such as differences in the use of quantitative and qualitative reporting and varied reports on transition planning. Some firms failed to include a signed compliance statement to confirm the report complied with FCA rules.

The report also shows different approaches for product-level reporting, possibly caused due to a lack of specific guidance from the FCA, creating a risk that almost identical products have different disclosures.

The report sets out areas for asset managers to focus on, which include being consistent with wider sustainability reporting, consumer testing and usability, and data timing. The IA states it will use the report to evaluate where further guidance from the FCA might be helpful. 

Investment Association guidance on severe but plausible operational resilience scenarios

The IA has also published member guidance on severe but plausible (SBP) scenarios in the context of operational resilience. The guidance aims to address the ambiguity concerning the concept of SBP scenarios and to identify best practices in calibrating them. It also sets out the approach that firms should take in respect of them.

The guidance contains an SBP library, structured by resource pillars (people, facilities, technology, data, and third parties), with suggested impact scenarios provided for each pillar.

The FCA expects firms to manage their business so they always operate within impact tolerances, including during SBP scenarios. Firms must do this by the end of the operational resilience implementation period at the end of March 2025.

Council of EU revised text of proposed directive amending AIFMD and UCITS directive

The Council of the EU published a revised version of the proposed directive amending the AIFMD and the UCITS directive relating to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by AIFs. This has now been published in the EU's Official Journal, and "AIFMD II" will enter into force 16 April 2026.

Please read more about this in our Insight which provides an overview of the key changes.

Directive and regulation to improve MiFID II market data access and transparency published

The following legislation has been published in the EU's Official Journal:

• Directive (EU) 2024/790 amending Markets in Financial Instruments Directive (MiFID II)
• Regulation (EU) 2024/791 amending Markets in Financial Instruments Regulation (MiFIR) with regard to enhancing data transparency, removing obstacles to the emergence of consolidated tapes, optimising the trading obligations and prohibiting receiving payment for order flow.

The legislation makes amendments to the MiFID II regime to improve access to market data and transparency. The MiFIR Amending Regulation has introduced an EU-wide consolidated tape that brings together market data provided by platforms on which financial instruments are traded in the Union. It also includes a prohibition on receiving payment for order flow. This seeks to phase out the practice of brokers receiving payments for forwarding client orders to trading platforms.

The MiFID Amending Directive makes consequential changes to ensure consistency with the amendments to MiFIR. The amending legislation will enter into force 28 March 2024.

The MiFIR Amending Regulation will then apply immediately in all Member States. Member States will have until 29 September 2025 to bring into force the laws, regulations and administrative provisions necessary to comply with the MiFID Amending Directive.