International Funds Legal Update | March 2025

UK and EU regulators set out  supervisory priorities

The Financial Conduct Authority (FCA) has published a  "Dear CEO" letter setting forth its priorities for the asset management and alternatives portfolios as well providing its conclusions following a multi-firm review on private market. Noteworthy points in the Dear CEO letter highlights no less than three multi-firm reviews, and are:

• Supporting confident investing in private markets. During 2025, the FCA will begin an additional multi-firm review of conflicts of interest at firms managing private assets. This will investigate how firms oversee their conflict of interest framework through governance bodies and reviews to ensure uncompromised investor outcomes. It expects to see evolving and updated procedures to identify, manage and mitigate conflicts of interest.
• Building financial-system resilience against market disruption. The regulator will focus on prudent risk management, liquidity management and operational resilience. It will continue to monitor liquidity risk and will consider findings on margin preparedness from both Bank of England's report on its system-wide exploratory scenario exercise and the Financial Stability Board's report on liquidity preparedness for margin and collateral calls. Finally, the regulator will focus on outlier firms and funds with high leverage, illiquidity or concentrated investment.
• Securing positive outcomes for consumers. The regulator will publish the findings of its multi-firm review of unit-linked funds later this year. It will also start a multi-firm review of model portfolio services focusing on how firms are applying the consumer duty.
• Targeted work. The regulator will engage with firms with sustainability-related products, to understand how they are implementing the labelling, naming and marketing rules. Furthermore, it will focus on financial crime and market abuse.

The FCA is requiring firms' CEOs to discuss the letter with their board, executive committee and accountable senior managers to consider whether the risks of harm discussed in the letter exist in their firm and implement strategies for managing them.

Meanwhile in the European Union, European Securities and Markets Authority (ESMA) has the launch of a common supervisory action (CSA) on the compliance and internal audit functions of retail management companies, known as UCITS (undertakings for collective investment in transferable securities) funds, as well as managers of alternative investment funds (AIFMs) across the European Economic Area.

The CSA will be conducted throughout the year and will assess the extent to which UCITS management companies and AIFMs have established effective compliance and internal audit functions with adequate staffing, authority, knowledge and expertise to perform their duties under the AIFMs and UCITS frameworks.

The compliance and internal audit functions are designed to ensure that the internal control mechanisms to monitor, identify, measure and mitigate any possible risks of non-compliance with the applicable rules are in place. The work will be done using a common assessment framework developed by ESMA. The framework sets out the scope, methodology, supervisory expectations and timeline on how to carry out a CSA in a convergent way.

ESMA plan to publish a final report with their findings in 2026.

Vote reporting: voluntary template for asset managers

The FCA's Vote Reporting Group (VRG) has published a feedback statement on its consultation on a voluntary vote reporting template for asset managers in the UK. Firms do not need to take any immediate action regarding their vote reporting.

Respondents were supportive of the VRG's aim to create a voluntary, standardised and comprehensive vote reporting template for UK asset managers to use when reporting to their clients. Going forward, the Pensions and Lifetime Savings Association (PLSA) will be responsible for oversight of the template and its existing template will be updated to incorporate the VRG's agreed template. The PLSA will publish FAQs and guidance to support the new template later this year.

Authorised fund applications

The FCA have published a document setting out its expectations on applications. The document is for businesses applying for collective investment schemes to be authorised as authorised unit trusts, authorised contractual schemes or authorised open-ended investment companies. The information covers the main areas where applicants often fail to provide necessary information. Incomplete applications are not subject to the FCA's normal processing time limits and could be refused.

HM Treasury publishes Reserved Investor Fund regulations

The Unauthorised Co-ownership Alternative Investment Funds (Reserved Investor Fund) Regulations 2025 have been published, together with an explanatory memorandum supporting the government's introduction of the Reserved Investor Fund mainly relevant for real estate funds. The regulations came into force on 19 March, alongside the Co-ownership Contractual Schemes (Tax) Regulations 2025. They enable the establishment of new the investment vehicles by ensuring that prospective investors have the appropriate rights and liabilities and that there are appropriate provisions for the making of contracts.

Commission clarifies its approach to EU sustainability disclosures

The European Commission has published a notice on its interpretation and implementation of three "level 2" delegated acts relating to the European Union's taxonomy for sustainable economic activities and related sustainability disclosures in the financial services sector. These include the Taxonomy Environmental Delegated Act, the Taxonomy Climate Delegated Act and the Taxonomy Disclosures Delegated Act.

The note contains technical clarifications responding to frequently asked questions about:

• The objectives of climate change mitigation and climate change adaptation.
• The objectives of water and marine resources, the transition to a circular economy, pollution prevention and control, and biodiversity and ecosystems.
• The generic "do no significant harm" criteria for climate change adaptation, for pollution prevention and control and for the protection and restoration of biodiversity and ecosystems.
• The Taxonomy Disclosures Delegated Act.

The note facilitates implementing the legislation and does not introduce any additional requirements.