International Funds Legal Update | 31 March 2023

Welcome to a new edition of our International Funds Legal Update.

In this edition, we take a look at the latest UK, EU and international regulatory developments for the investment funds and asset management industry, including the Financial Conduct Authority's (FCA) decision to delay its sustainability disclosure requirements, measures announced in the UK's Spring Budget 2023, the FCA's proposals for a new simplified advice regime, proposals to expand the UK financial promotion regime to include cryptoasset promotions, delay to the FCA's proposal to exclude investment funds from relying on a Consumer Duty exemption, and the EU's macroprudential supervision of the investment management sector.

FCA delays publication of its sustainability disclosure rules

On 29 March 2023, the FCA announced a delay to the publication of its policy statement on the Sustainability Disclosure Requirements and investment labels to the third quarter of this year. This means that the general "anti-greenwashing rule" that was expected to come into force on 30 June 2023 will now be pushed back (as will the other disclosure milestones that followed and are set out in the FCA's).

The FCA received 240 written responses to its consultation that closed on 25 January 2023. While on the whole there was broad support for the proposed regime, the FCA will be taking this time to consider carefully the feedback it received on some of the detail. This is to ensure that the final rules adequately protect consumers and take into consideration practical challenges that firms may face in respect of their implementation. The FCA has also confirmed that the policy statement will clarify matters such as that primary and secondary channels for achieving sustainability outcomes will not be prescribed and that the regulator will not require independent verification of product categorisation to qualify for a label.

With a nod towards the EU's Sustainable Finance Disclosure Regulation and corresponding rules in the US (and elsewhere), the FCA announcement reaffirms its desire to achieve international coherence with other regimes and says it will continue to consider how to further support compatibility, while emphasising the need for robust standards to ensure the UK remains at the global forefront of sustainable investment.

Spring Budget 2023: what UK tax measures might affect funds?

On 15 March 2023, the chancellor, Jeremy Hunt, delivered a range of tax measures in his Budget to support an agenda centred on increasing business investment to enhance productivity and expanding the domestic workforce to encourage growth. 

Alongside a range of business and personal tax measures, there were a number of announcements relevant to the investment funds industry, including:

• Improvements to Real Estate Investment Trusts.
• Targeted changes to the regime for qualifying asset-holding companies.
• The government will publish its response to the consultation on the reform of VAT on fund management in the coming months.
• The government will legislate in the Spring Finance Bill 2023 on carried interest rules. It will provide a new elective accruals basis of taxation for carried interest. 
• Changes to improve the landscape for companies undertaking intensive research and development.

Michael Moore, director-general of the British Private Equity and Venture Capital Association (BVCA), commented: “The chancellor’s focus on economic growth, science and innovation are the right priorities. Private capital has a vital role to play in driving those ambitions and the announcements today on unlocking capital and continuing reforms to capital markets are hugely welcome."  

For more information on these and other proposals announced in the Budget, see our Insight.

FCA to simplify UK advice regime and guidance boundary review

On 21 March 2023, the FCA published a speech by Therese Chambers, its director of consumer investments, who noted that, although the reforms implemented as part of the Retail Distribution Review a decade ago have been positive, it is important to acknowledge where the sector could and should be performing better.

The speech focused on the following areas:

• CP22/24 on core investment advice. The FCA wants to see a consumer investment market in which consumers can invest with confidence, understand the risks they are taking, and the regulatory protections provided. The FCA believes there is a strong appetite for a market for cheaper and more simplified financial advice to help these consumers. In November last year, the FCA published a consultation paper on broadening access to financial advice for mainstream investments. The proposals seek to make it easier and cheaper for firms to provide streamlined advice for consumers investing in mainstream investments via a Stocks and Shares ISA wrapper. Responses to the consultation revealed that firms are keen to do more in this area and support the premise of a core investment advice regime, which will work for many business models. The FCA is considering the best way to take forward any simplified advice regime as well as the timeline for doing so.
• Advice and guidance boundary review.  As announced in 2022, the FCA and HM Treasury will be jointly carrying out a holistic review of the boundary between advice and guidance. Notably, Ms Chambers confirmed that accumulation products (including general investment accounts, ISAs and pension wrappers) will be within the scope of the review, as will decumulating assets, including pensions decumulation. However, defined benefit transfer advice (even below the £30,000 threshold for advice) and any other pensions with safeguarded benefits (for example, the Guaranteed Minimum Pension or a guaranteed annuity rate) will be excluded from the review. Given this will be a substantial piece of work, the FCA says that it will inevitably take time, and the regulator is considering how to organise industry engagement in the review.
• Future Disclosure Framework. The FCA is evaluating responses to its earlier discussion paper on the Future Disclosure Framework and aims to provide feedback on this "in due course". It has seen positive responses towards a principles-based approach and establishing flexibility to allow firms to effectively communicate disclosure to consumers.
• The Consumer Duty. The FCA has seen good progress from firms in implementing the Consumer Duty and has issued a range of materials on its website to help firms understand what this means for their business. However, the FCA believes that there is more firms could be doing now within the existing framework and emphasises the importance of providing information to their customers to enable them to understand their options and the risks and consequences of any decision.
• Regulatory Sandbox. Ms Chambers highlighted the role of the Regulatory Sandbox in allowing firms to test innovative propositions on personalised guidance, and the role of the Digital Sandbox as an online platform where firms can access data sets to test and build prototype solutions. She encouraged interested firms to speak to the FCA to discuss these opportunities

FCA forum publishes best practice guide on climate change

On 23 March 2023, the FCA updated its webpage on the Climate Financial Risk Forum (CFRF), which shares best practice across financial regulators and industry to advance the sector’s responses to financial risks from climate change. 

The CFRF has published its third round of guides to help the financial sector develop its approach to addressing these climate-related financial risks and opportunities. The guide for asset managers is largely written by practitioners, for practitioners and is intended to support asset managers in developing their scenario analysis to manage climate risk and prepare for climate action. It outlines the current state and possible future direction for the development of scenario analysis, as used by and applied to asset managers.

Cryptoassets to be bought within the UK's financial promotions regime

On 27 March 2023, a draft version of the Financial Services and Markets Act 2000 (Financial Promotion) Amendment) Order 2023 was published, together with a draft explanatory memorandum. The draft order proposes to expand the scope of the financial promotion restriction in section 21 of the Financial Services and Markets Act 2000 to include financial promotions in respect of certain cryptoassets.

For more information on the scope of the order, the timing for implementation and what this means for firms operating in this space, please see our Insight.

FCA defers decision on significant change to UK Consumer Duty's scope

The FCA has confirmed that it will not be progressing its consultation proposal to exclude investment funds from being able to rely on a Consumer Duty exemption for products with a minimum investment amount of £50,000 at this time. The FCA has informed the BVCA and other industry associations that respondents had raised several concerns that it wished to consider more fully. The regulator also said that if the proposal is taken forward in the future, it would provide an appropriate implementation period for firms to adjust to any changes.

ESMA looks for the global debate on macro-prudential supervision to inform European framework

On 21 March 2023, Verena Ross, chair of the European Securities and Markets Authority (ESMA), delivered a speech on "The macro-prudential supervision of investment funds – from a global debate to a balanced European regulatory frameworks". Ms Ross focused on how the remaining vulnerabilities of open-ended funds (OEFs) are being kept under close scrutiny at global level and the EU reforms underway to tackle the systemic risk posed by investment funds, in particular those arising from liquidity mismatch and excessive leverage.

The speech highlighted that, in 2022, the assets under management of investment funds experienced their sharpest decline in the EU since the global financial crisis (down by 11% in the euro area to €16 trillion), with equity funds being hit hardest. However, despite the stress in stock and bond markets experienced over the last year, asset managers have, in most cases, managed to deal effectively with redemptions through liquidity management procedures and tools (combined with greater regulatory focus on the monitoring of liquidity and valuation issues).

Ms Ross points to the liability-driven investment funds (LDIs) event in the UK to illustrate how risks can materialise from sudden and unexpected shocks coming on top of existing vulnerabilities. Accordingly, it is crucial for asset managers to identify, monitor and address the remaining vulnerabilities in the asset management sector and identify the possible channels of contagion to the rest of the financial system.

In the second part of her speech, Ms Ross discussed what steps are being taken by regulators to address the remaining vulnerabilities in the fund sector, including:

• Work undertaken by the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) to promote greater availability and use of liquidity management tools (LMTs). The FSB and IOSCO are developing detailed guidance on the design and use of LMTs, and to enhance the availability of data for financial stability monitoring and promote the use of stress testing.
• The review of the Alternative Investment Fund Managers Directive, which aims at addressing – among other things – the development of an EU framework for the design and use of LMTs, harmonised rules for loan-origination funds and the creation of a brand-new approach to reporting by UCITS (undertakings for the collective investment in transferable securities).
• Proposals from ESMA on the review of the Money Market Funds Regulation to strengthen the European framework.

ESMA is actively monitoring risks arising from liquidity and excessive leverage and expects managers to monitor the alignment of their funds’ investment strategy, their liquidity profile and their redemption policy. Asset managers should assume their responsibility in managing their funds prudently in these challenging macro-economic times, and prepare for further and prolonged adverse events.

EU publishes corrigendum to delegated regulation amending regulatory technical standards

On 16 March 2023, a corrigendum to Commission Delegated Regulation (EU) 2021/2268, which amends the regulatory technical standards (RTS) laid down in Commission Delegated Regulation (EU) 2017/653 (the PRIIPs KID Delegated Regulation) was published in the Official Journal.

The corrigendum replaces points 13 and 17 of part 1 of annex II to the PRIIPs KID Delegated Regulation as set out in annex II to the Commission Delegated Regulation (EU) 2021/2268. Part 1 relates to market risk assessment in the context of the methodology that PRIIPs (packaged retail and insurance-based investment products) "manufacturers" must use to present risk in the PRIIPs KID (key information document).

Commission Delegated Regulation (EU) 2021/2268 was originally published in the Official Journal on 20 December 2021 and entered into force on 9 January 2022. The application date of the majority of its provisions was subsequently amended to 1 January 2023 by Commission Delegated Regulation (EU) 2022/975.

European long-term investment funds get new regulatory amendment

On 20 March 2023, Regulation (EU) 2023/606 was published in the Official Journal of the European Union amending Regulation (EU) 2015/760 on the requirements for investment policies and operating conditions of European long-term investment funds (ELTIF) and the scope of eligible investment assets, the portfolio composition and diversification requirements and the borrowing of cash and other fund rules.

The amendment of the ELTIF Regulation of 2015 enters into force on 9 April 2023 (20 days after publication in the Official Journal). It applies from 10 January 2024.

Existing ELTIFs will be deemed to comply with the amending regulation for five years, although they can choose to be subject to the amending regulation by notifying the fund's competent authority. This is because article 2 of the amending regulation states that ELTIFs authorised under and complying with the ELTIF Regulation before 10 January 2024 will be deemed to comply with the amending regulation until 11 January 2029. ELTIFs that do not raise additional capital will also be deemed to comply with the amending regulation.