International Funds Legal Update | May 2023

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

In this edition, we look at the latest UK, EU and international regulatory developments for the investment funds and asset management industry, including the UK Green Finance Strategy 2023, the review of the UK Senior Managers and Certification Regime, and a raft of publications relating to the EU's green taxonomy and sustainable finance disclosure regime.

UK Green Finance Strategy 2023: 'Mobilising green investment'

The 2023 Green Finance Strategy sets out how the UK government will ensure that necessary finance flows to the UK's net zero, energy security and environmental industries. For more information on the proposals in the Green Finance Strategy, please see our Insight.

Review of the Senior Managers and Certification Regime

On 30 March 2023, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published Discussion Paper 1/23: Review of the Senior Managers and Certification Regime (DP23/3), with a deadline for responses of 1 June 2023.

This follows the government's announcement in December 2022, as part of the Edinburgh Reforms, that HM Treasury, the FCA and the PRA would commence separate reviews of the Senior Managers and Certification Regime (SMCR). The FCA and PRA are reviewing its effectiveness, scope and proportionality.

HM Treasury has in parallel launched a Call for Evidence to look at the legislative aspects of the regime. The reviews aim to understand stakeholders' views on the functioning of the SMCR and identify ways to improve the regime to help it work better for firms and regulators, while preserving its underlying aims.

Responses to DP23/3 will inform whether there is a case for the regulators to propose specific changes to the rules and guidance that implement the SMCR, which if taken forward would be subject to the usual consultation process.

European Commission consults on new taxonomy criteria

On 5 April 2023, the European Commission published a consultation on two proposed delegated regulations relating to the EU Taxonomy Regulation:

• Draft Taxonomy Environmental Delegated Act, which sets out additional criteria for adding economic activities that make a substantial contribution to the EU taxonomy's environmental objectives. 
• Draft Delegated Act amending the Taxonomy Climate Delegated Act, which covers the environmental objectives of climate change mitigation and adaptation not yet included in the rules. These include manufacturing activities for key components for low carbon transport and electrical equipment, and transitional activities in waterborne transport and aviation where zero-carbon solutions are not yet sufficiently advanced.

The consultation closes on 3 May 2023.

European authorities consult on changes to disclosures under SFDR

On 12 April 2023, the European Supervisory Authorities (ESAs) published a consultation paper on proposed amendments to the regulatory technical standards (RTS) on content and presentation of principal adverse impacts (PAI) and financial product disclosures in Commission Delegated Regulation (EU) 2022/1288, which supplements the Sustainable Finance Disclosure Regulation (SFDR). The consultation closes on 4 July 2023.

The proposals aim to broaden the disclosure framework and address the key technical issues that have emerged since the SFDR was initially agreed. They also reflect experiences shared by stakeholders through Q&As and observations from local regulators.

The proposals include:

• Extending and enhancing the list of social indicators for PAIs.
• Refining the content of some of the other indicators for adverse impacts and their definitions, applicable methodologies, metrics and presentation.
• Making amendments regarding decarbonisation targets.
• The potential introduction of more specific disclosure requirements regarding the "do no significant harm" principle, to increase transparency and support some degree of comparability.
• Simplifying the language in the financial product templates to help retail investors understand them and introducing a new dedicated "dashboard" of key information.
• Making some other technical adjustments with respect to, for example, the treatment of derivatives, the definition of equivalent information, and provisions for financial products with underlying investment options.

The ESAs will organise a public hearing and targeted consumer testing during the consultation period. After considering the feedback, they will prepare a final report and submit it to the European Commission.

European Commission adopts new and updated answers to questions on SFDR application

On 14 April 2023, the European Commission published an internal Commission Decision on the answers to be provided to questions relating to the application of SFDR.

Annex 1 sets out the Commission's new answers to questions submitted by the ESAs on 9 September 2022. Annex 2 sets out updated answers adopted on 6 July 2021 and 13 May 2022.

The Commission explains that the new and amended answers are needed to ensure consistency in how SFDR is interpreted. They aim to clarify the interaction between SFDR and other elements of the sustainable finance framework in terms of disclosures concerning sustainable investments.

The covering letter has also been published, in which the Commission asks the ESAs to publish the new and updated answers on their websites, and suggests that an appropriate disclaimer be added explaining that the answers are for clarificatory purposes only and do not introduce any additional requirements.