Welcome to the latest edition of our investment management update. This publication has been tailored to highlight topical news, cases and changes in the law impacting the investment management sector.
UK
- On 27 July, the Transition Plan Taskforce (TPT) issued a status update about its consultation
on a draft Disclosure Framework for companies' net zero
transition plans. The statement outlines the feedback that TPT
received in response to its proposals, including in relation to
international consistency and addressing uncertainty in the current
stage of transition. The final Disclosure Framework and
draft Implementation Guidance will be published in October 2023,
and final guidance will be published by February 2024. The
TPT announced the sectors which will be subject to further specific
guidance, including asset management, asset owners, and banking.
There will be consultations on sector-specific guidance in
November 2023. Finally, in Q1 2024, the TPT will publish
recommendations for future work on transition planning after the
TPT's mandate ends in February 2024, and the Government
is expected to consult on mandating the largest companies to
disclose their transition plans.
- On 25 July, the FCA published Market Watch 74, a newsletter on
market conduct and transaction reporting. The latest edition
outlines the FCA's supervisory observations in respect
of transaction reporting (under RTS 22) and on the submission of
financial instrument reference data (under RTS 23). Firms
should review their practices against the various areas outlined in
the report.
- On 19 July, the Financial Reporting Council (FRC), in its
capacity as the secretariat to the UK Sustainability Disclosure
Technical Advisory Committee, published a call for evidence on the
proposed adoption of the ISSB disclosure standard in the
UK. The FRC is seeking to understand the impacts of
incorporating the ISSB, including in respect of the comparability
of disclosures, the feasibility of reporting and its relation to
the financial reporting schedule. Comments are requested by 11
October.
- On 18 July, the Bank of England and FCA jointly published a consultation (CP13/23) on
margin requirements for non-centrally cleared
derivatives. The consultation proposes: a temporary
exemption (from 4 January 2024 until 4 January 2026) for
single-stock equity options and index options from the bilateral
margining requirements; and declining to implement a pre-approval
requirement for Initial Margin Models (as proposed by the BCBS and
IOSCO). The consultation will close on 18 October.
- On 17 July, the FCA announced a second delay to
Sustainability Disclosure Requirements (SDR) final rules from Q3 to
Q4 2023. The FCA is focusing on revising the rules
following feedback received in response to its consultation on the
draft rules. Much of the industry's feedback focused on
problems relating to the fund labelling regime and the marketing
and naming rules. The delay to the final rules also means that the
first part of SDRs, the anti-greenwashing rule, will be delayed
until shortly after publication.
- On 12 July, the FCA published a feedback statement (FS23/4)
on "The potential competition impacts of Big Tech entry and
expansion in retail financial services". The
statement outlines various current and future regulatory policies,
including the Consumer Duty, that the FCA believes will
sufficiently protect and maintain competition. However, the FCA
identifies three areas for further work: an
upcoming Call for Input by the end of 2023 on Big Tech's role
as a gatekeeper and the role of data asymmetry between financial
services and Big Tech companies; a review of the supervisory
approach to Big Tech and the inclusion of its activities in the
regulatory perimeter; and working with the Government as the
Digital Markets, Competition and Consumers Bill reaches conclusion
in Parliament.
- On 10 July, the Chancellor delivered a speech at Mansion House detailing
several policy developments, some of which build on December's
Edinburgh Reforms. The announcements include several
proposals to encourage pension schemes to invest more in UK and
illiquid assets. The package includes a voluntary
commitment on behalf of the UK's largest Defined Contribution
scheme providers to allocate at least 5% of their default
strategies to unlisted equities by 2030.
- The Mansion House speech was accompanied by confirmation from the Government that it will
revoke the on-shored PRIIPs Regulation and introduce a new
UK Retail Disclosure Regime. The Government will legislate
by 2024 to empower the FCA to deliver a new regime, while the FCA
will consult on its design and, eventually, the PRIIPs legislation
will be revoked by statutory instrument.
- The Mansion House speech was also accompanied by the
Government's publication of the conclusions of the
Investment Research Review. The report recommends giving
firms the flexibility to pay for research from their own financial
resources, charge clients, or to re-bundle research payments with
execution fees (i.e., reverse the MiFID research
"unbundling" rule). The report also recommends
various measures to boost the UK research industry and suggests
that regulators should review and clarify aspects of the regulatory
regime, including considering reforms. The Government has accepted
the recommendations and will address them in due course.
- On 6 July, the FCA published the results of a multi-firm review of liquidity management by
Authorised Fund Managers (AFMs) and, alongside the results, a letter to asset management CEOs. The letter
directs asset managers to review their liquidity management
arrangements against the results of the review and to make
improvements. Although the multi-firm review concerned
AFMs, the FCA states that it expects that all AIFMs and other asset
managers should consider the findings and describes its output as
"a warning to all asset managers". The
review found a disparity in practices among firms and highlights
areas such as governance and oversight, liquidity stress testing,
dealing with cumulative or market-wide redemptions, and the
application of anti-dilution tools such as swing pricing. Please see our detailed note on the FCA's
publications, and the recently published FSB and IOSCO
recommendations that are summarised below.
- On 5 July, an industry expert group formed by the FCA, the ESG
Data and Ratings Working Group, launched a consultation on a draft
Code of Conduct for ESG Ratings and Data Product
Providers. The Code of Conduct aims to address several
risks that could undermine the trust, efficiency and transparency
of the market for these products. These risks include lack of
consistency and transparency in ratings methods, conflicts of
interest, and accurate disclosures to investors. The draft is based
on IOSCO's recommendations. The consultation will close on 5
October.
- On 5 July, the FCA published a consultation (CP23/15) on the framework for a UK consolidated tape. The FCA outlines a regulatory regime to support the creation of a consolidated tape for fixed income, including the requirements for a provider and the tender process for their selection. The consultation also contemplates a regime for equities and ETFs. The deadline for feedback is 15 September.
Europe ex UK
- On 20 July, the European Commission reported to the other EU institutions on its
recommendations for reform to the Money Market Funds Regulation
(MMFR). The Commission suggests keeping the MMFR largely
intact but does propose changes to the liquidity risk management
provisions. Specifically, the report suggested delinking
the breaches of minimum liquidity thresholds with the requirement
to impose liquidity risk management tools such as gating and
anti-dilution fees. The report draws on FSB and ESA recommendations
and the Commission's consultation on the functioning of the
MMFR. A legislative proposal is not likely to emerge until after
the current Commission mandate ends and the European Parliament
elections happen in June 2024.
- On 19 July, the EU's institutions reached a political agreement on
reforms to the AIFMD (AIFMD II) and the UCITS regime. The
reforms introduce new reporting requirements for delegation
arrangements and the potential for an ESMA review of those
arrangements (but no hard restrictions on delegation or a
requirement for ESMA approval); the introduction of a new regime
for loan origination funds; a new requirement for managers to
select and disclose at least two liquidity management tools from a
prescribed list when applying for an AIF to be authorised; and
reference is made to the payment of compensation when undue costs
have been imposed on an investor (although the concept of
"undue costs" will be better defined via the upcoming
Retail Investment Strategy). The final legislative text is likely
to be published in September after legal and technical work is
undertaken on the provisions.
- On 11 July, ESMA published a Public Statement outlining its
interpretation of how the Prospectus Regulation applies to
sustainability-related information. ESMA's statement applies to
the disclosure of sustainability-related information in equity and
non-equity prospectuses. The guidance clarifies that ESG
information should be included in prospectuses, and not only
marketing materials, if it is material information.
- On 7 July, a coalition of sustainable investment-related
groups, including the PRI, Eurosif and EFAMA, along with almost 100
asset managers, sent a joint statement to the European
Commission requesting no relaxation of its European
Sustainability Reporting Standards (ESRS), which form the
core of the EU's Corporate Sustainability Reporting Directive.
The signatories fear that a reduction in the content of the ESRS
will negatively impact the availability of sustainability-related
information for investors, and asset managers' ability to
comply with their regulatory obligations such as the SFDR. The
European Commission and some national regulators are concerned that
the draft ESRS might impose difficult-to-achieve reporting
obligations on companies.
- On 6 July, ESMA launched a Common Supervisory Action (CSA) with national regulators on sustainability-related disclosures and asset managers' integration of sustainability-related risks. The CSA will assess managers' compliance with the SFDR, and the ESG-related amendments to AIFMD and UCITS. The CSA will also gather intelligence about greenwashing risks and the CSA might lead to supervisory or regulatory interventions, such as enforcement and rule changes.
International
- On 25 July, IOSCO endorsed the ISSB's sustainability and
climate-related company disclosure standards. IOSCO
recommends that its 130 member jurisdictions incorporate the
voluntary ISSB standard into their regulatory frameworks.
Later this year, IOSCO and the IFRS will publish an Adoption Guide for regulators.
In related news, it was confirmed that the ISSB will take over from the Financial Stability Board
in monitoring the progress and adoption of the Taskforce for
Climate-related Financial Disclosures (TCFD) standard. The ISSB
also published a comparison of its climate
disclosure standard with the TCFD recommendations.
- On 5 July, the FSB published a consultation on an update to its
recommendations, "Addressing Structural Vulnerabilities from
Liquidity Mismatch in Open-Ended Funds". The update comprises
8 recommendations that broadly address three areas. First,
transparency and reporting: the FSB recommends a
liquidity
"bucketing"
approach (like the US SEC's rule) that
requires managers to group assets and funds into classifications
based on their liquidity and to report the data to regulators.
Second, greater clarity on redemptions, including a recommendation
that funds with over 30% of assets bucketed as
"illiquid"
should have "long notice periods".
Finally, the FSB recommends that managers should have an array of
available liquidity risk management tools, clarity over their
potential use and means of addressing the first-mover advantage,
and regulatory parameters set around the use of
tools. The consultation will close on 4 September. As
referenced above in respect of the FCA's publication on 5 July,
we have published a detailed note on July's
liquidity developments.
- In parallel, on 5 July, IOSCO published a consultation in response to a previous FSB request for more guidance on the use of anti-dilution tools. IOSCO's guidance aims to protect investors when these tools, such as swing pricing are used, but also to enhance financial stability by removing the first-mover advantage potentially enjoyed by investors that redeem earlier than others. IOSCO's guidance outlines six guiding principles for managers. It does not seek to determine how anti-dilution tools should be calibrated, such as the degree of 'swing' that might be applied to the price, but rather to describe the features of a well-designed system. The consultation will close on 4 September. See our detailed note on July's fund liquidity developments.
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