FCA puts forward its future agenda for asset managers
Ashley Alder, chair of the Financial Conduct Authority (FCA), spoke at the Bloomberg Buy-side Forum in May on the regulator's agenda for the asset management sector. Mr Alders speech, which was entitled "Our ambitious agenda for UK asset management", covered areas of current focus for the UK financial regulator.
The speech looked at the development of the post-Brexit smarter regulatory framework; private finance, non-bank financial intermediation and valuations; retail investments, in particular to packaged retail and insurance-based investment products; the sustainability disclosure requirements; and opportunities for innovation, including fund tokenisation.
On the same day, the UK prime minister, Rishi Sunak, requested the dissolution of Parliament from King Charles III and announced a UK general election on the 4 July. This will impact the regulator's set agenda and the FCA has stated that it will consider when it will be able to update its regulatory initiatives grid accordingly later this year.
The speech also addressed UK competitiveness and growth, which both the Conservative and Labour parties have emphasised in the run up to general election.
Asset managers receive letters from the FCA.
The FCA has published a series of "Dear CEO letters" on implementing the new consumer duty for closed products and services that have been sent to a range of firms, including one for asset managers.
The letter explains the application of the duty to closed product and services and identifies priority issues. These are addressing gaps in customer data, ensuring the fair value of products and services, how to treat consumers with characteristics of vulnerability, "gone away" or disengaged customers and vested contractual rights. It highlights actions required to make sure that asset managers are prepared for the 31 July 2024 deadline, where the consumer duty will apply to closed products.
Firms' senior management are expected to carefully consider the contents of the letter and take steps to ensure their firm is compliant with the duty by the deadline.
Asset managers will need to make sure, and be able to show the FCA, that they are acting to deliver good customer outcomes.
Investment trusts will remain alternative investment funds in the UK
Due to the announcement of the UK general elections, the Alternative Investment Fund Designation Bill 2023-24 will make no further progress since Parliament has been prorogued. The private members' bill set forth by Baroness Altmann aimed to amend the AIFMD UK Regulation to remove listed investment companies (investment trusts) from designation as AIFs. This was mainly to address cost disclosures issues.
There are no rules against Altmann resubmitting her bill for ballot, with the same wording in the next session, but there is no guarantee that it will be selected a second time around or what priority it will get if it does make the cut.
The FCA has, however, recognised the problem of cost-disclosures in relation to investment trusts and put forbearance measures in place, and is seeking to address this issue in its future reform package for fund disclosures. This will require the UK government to revoke parts of EU law assimilated into UK law and replace this with domestic rules. The regulator had prepared to consult on new rules by the end of this month. HM Treasury had prepared a draft statutory instrument to pave the way for this in December 2023, subject to approval from each house of Parliament.
The disclosure reforms are part of the broader Financial Services and Markets Act (FSMA) 2023 reform package. Labour has stated that it will take forward "in flight" regulatory FSMA 2023 reforms in its white paper "Financing Growth: Labour's plan for financial services", providing it forms the next government.
Overseas Funds Regulation published
The Overseas Funds Regulations have been published, with an explanatory memorandum. All authorised retail funds, known as UCITS (Undertakings for the Collective Investment in Transferable Securities), from European Economic Area (EEA) states have been determined as equivalent for the purpose of the Financial Services and Markets Act section 271A, except money market funds.
This allows EEA UCITS to apply to the FCA for recognition to market to all UK investors, including deep retail, under the fast track provisions of the act. The regulations come into force on 16 July 2024.
More colour is provided on how to be green
The FCA has provided updates on the sustainability disclosure and labelling regime to reflect that the anti-greenwashing rule and guidance has now come into force.
A new "criteria" section has been added to the website that provides more information on the regulator's view of aspects of the regime.
- Sustainability objective. To qualify for a label, a fund must have a sustainability objective that is clear, specific and measurable, and part of the fund's investment objectives. Referring to broad statements is unlikely to be specific.
- Sustainability fund types. Information is provided relating to each of the three types of sustainable fund types: sustainability focus, improvers and impact funds.
- Key performance indicators (KPIs). Pre-contractual disclosures must include details of the KPIs that will be used to measure progress towards meeting the sustainability objective. This is in addition to other metrics that a client may reasonably find useful in understanding the investment policy and strategy for the fund.
- Stewardship. It is recognised that stewardship can take place in different forms. The FCA explains that disclosures should clearly provide clarity on how the stewardship strategy supports delivery of the particular sustainability objective for the fund.
- Asset classes. The regulator confirms that it is not prescriptive around how certain assets should be treated.
Further assistance on the SDR can be found in "Guidance v1.0" recently published by the Investment Association.
This includes questions and answers on the anti-greenwashing rule; the labelling regime and naming and marketing rules for fund managers; fund authorisations and FCA notification; requirements for overseas funds marketed in the UK; sustainability disclosures for fund managers; and stewardship requirements.
ESMA provides its guidelines on funds' ESG names
The European Securities and Markets Authority (ESMA) have published its long-anticipated final report setting out its guidelines on funds' names using environmental, social and governance (ESG) or sustainability-related terms.
The guidelines aim to unambiguously regulate the use of words or acronyms that are in themselves indicative (or even merely allusive) of sustainability-oriented investment strategies within the names of investment funds.
Key points are:
- A minimum threshold of 80% of investments must be used to meet ESG/sustainable investment objectives.
- Bring in exclusions relating to the use of terms in fund names.
- Specify further criteria where terms are used in combination.
These will now be translated and will apply three months after publication of the translations. A transitional period for funds existing before the application date will be six months after that date. New funds created after the application date should apply the guidelines immediately in respect of those funds.
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