International Funds Legal Update | 6 November 2024
Published on 6th Nov 2024
Fund managers should take note of significant updates to the UK's retail disclosure regime that have been published
Investment trusts do not need to produce KIDs
A draft version of the Packaged Retail and Insurance-based Investment Products (Retail Disclosure) (Amendment) Regulations 2024 has been published together with an explanatory memorandum.
The draft makes transitional amendments mainly relating to cost disclosure requirements for listed closed-ended funds, in practice investment trusts.
The regulations add closed-ended investment companies that are UK-listed to the list of products excluded from the UK packaged retail and insurance-based investment products (PRIIPs) rules. Closed-ended investment UK-listed companies, such as investment trusts, will no longer be subject to the requirements of the UK PRIIPs regime. Manufacturers, advisors and sellers of shares in these entities will no longer be required to produce a key investor document (KID).
The new regulations will come into force the day after they are made – until then investment trusts can rely on Financial Conduct Authority "forbearance".
FCA issues forbearance statement on investment-trust disclosure requirements
The FCA has updated its statement on forbearance in relation to investment trust disclosure requirements. The regulator published the forbearance statement in September, together with a statement on reforms to the UK retail disclosure regime.
The UK financial regulator has applied immediate regulatory forbearance to provide certainty for firms before the legislation the government intends to lay in the second half of 2024 takes effect.
New section
The updated forbearance statement includes a new section that explains the implication of the forbearance and how it applies throughout the distribution chain to any firm carrying on business relating to these products, including manufacturing, distribution or marketing. All firms must continue to comply with other relevant rules and regulations, including the Consumer Duty and the requirements to ensure communications are fair, clear and not misleading. Firms also need to comply with the handbook requirement to act honestly, fairly and professionally in accordance with the best interests of clients.
The section also specifies that firms across the distribution chain must consider what approach will deliver good outcomes for their retail clients. Where firms choose not to provide a KID, they may wish to consider whether any additional product information is needed to support retail investors, in line with the requirements under the FCA's handbook to give consumers information to make effective, timely and properly informed decisions.
Product governance rules
Under product governance requirements, product manufacturers and distributors are generally required to share relevant information about the product to ensure it is appropriately distributed.
Distributor firms, or any firm preparing communications for retail customers, are also subject to Consumer Duty obligations relating to meeting the information needs of retail customers.
The FCA, in light of the forbearance statement, expects firms in the distribution chain for securities issued by investment trusts to seek to work together to determine and share what information is required to enable the continued distribution of these products – and in compliance with their more general obligations towards retail investors, including under the Consumer Duty.
The UK future disclosure regime is a step closer
A draft version of the Consumer Composite Investments (Designated Activities) Regulations 2024 has been published together with an explanatory memorandum.
The regulations set out the legislative basis for the new UK retail disclosure framework for consumer composite investments (CCIs) and replace existing law governing UK PRIIPs, mainly regulation 1286/2014.
What are the new regulations?
CCIs include funds, and the regulations will define CCIs and specify products that are excluded from the definition.
The regulations will also designate activities relating to CCIs for the purposes of the Financial Services and Markets Act 2000; these include manufacturing CCIs made available to UK-located retail investors, as well as advising them on and offering or selling them CCIs.
The FCA will also be enabled to make CCIs rules and give directions for the carrying on of CCI activities. There will be a temporary exclusion, expiring on 1 January 2027, from the CCI rules for operators of UK and European Economic Area (EEA) retail funds, which are UK or EEA UCITS Directive or UK non-UCITS retail schemes.
The regulations will also remove the existing exemptions, for persons advising on or selling PRIIPs, from the financial promotion and the scheme promotion restrictions when providing KIDs. This means that the provision of information required by the CCI rules may constitute a financial promotion or scheme promotion.
When do they come into force?
The regulations will come into force on the day on which the revocation of the UK PRIIPs regulation take effect.
