UK: Green Finance Taskforce Report (Investment Management Brief: 26 April 2018)

Updates from the Financial Regulation team at Pinsent Masons.

UK Regulatory

Green Finance Taskforce report

The Green Finance Taskforce published its "Accelerating Green Finance" Report [19.04.18] which notes that "the global challenge of raising the trillions needed to meet the two degrees or less scenario agreed in Paris 2015" cannot be achieved by "either public or private sectors working alone". The London Green Finance Initiative was set up in 2016 to bring such groups together and to consider how the UK, as a financial centre, could play a part. Sir Roger Gifford, chair of the Green Finance Initiative, was asked by the Government in September 2017 to chair the independent Taskforce. Its Report makes range of recommendations to Government on making green finance "an integral part of our financial system" and identifies a number of issues in the "value chain that must be untangled" so as to "unlock the private capital needed" and make green finance more widely available.

The 30 recommendations in the Report (most of which it says can be delivered in one to two years) are grouped into ten Themes - such as a new, unified brand for relaunching UK green finance (Theme 1), boosting investment in innovative clean technologies (Theme 5) or building a green infrastructure pipeline (Theme 8). The recommendations include:

  • a new Green Finance Institute brand with the new Institute setting up a Green Fintech Hub;
  • a Centre for Climate Analytics;
  • companies and investors using the Task Force on Climate-related Financial Disclosures (TCFD) framework for financial, governance and stewardship disclosures;
  • Green Building Passports for residential and commercial property;
  • funding early stage technology via grants from a Green Investment Accelerator;
  • a public-private green venture capital fund; and
  • a Sovereign Green Bond issued by Government.

Recommendations for clarifying investor roles and responsibilities (Theme 6) include:

  • regulators ensuring fiduciary duties "clearly state the importance of ESG issues";
  • Government requiring inclusion of "statements on the extent to which social, ethical and environmental issues (including climate change) are considered" in Statements of Investment Principles;
  • trustees engaging "with their beneficiaries to understand their beneficiaries preferences" and makign investment decisions based on them; and
  • investment advisors asking clients about their "sustainability preferences", and investment funds directly marketed to individuals stating clearly "the environmental and social impacts of the fund."

The Report also contains five "more ambitious reforms for the future" and a number of research proposals.

In his preface to the Report Sir Roger Gifford describes the proposals as "a comprehensive and holistic package of measures that can meet our capital needs to move to an economy based on low carbon energy." He also points out that the Taskforce had among its objectives: (i) "to further London as the leading world centre for green finance" and (ii) "to deliver against the Clean Growth Strategy to enable UK plc to benefit from the profound opportunity to green our economy." The Government is due to respond to the recommendations in the Report later in 2018 and The Green Finance Initiative will establish a committee to monitor the progress of the Taskforce's recommendations.

FCA publishes transcript of its Business Plan Press Conference

The FCA updated its Business Plan 2018/19 webpages [16.04.2018] to include the transcript of its Business Plan Press Conference [09.04 2018]. The transcript contains the FCA's responses to questions and Andrew Bailey's description of the FCA's Sector Views as "fairly unique", saying he was not "aware of another financial regulator that does something like this". He flagged their importance as a "backdrop" to the Business Plan and the FCA use of them in setting the priorities in the Business Plan. Andrew Bailey also spoke about the complications of accommodating Brexit work in the Business Plan 2018/19, given the "uncertainty both on the substance of the work and on the timing". Additionally it is important that working on Brexit does not jeopardise the FCA fulfilling its statutory objectives – which he called "the bedrock of what we do". In Bailey's view it is important the FCA continues to be "outward-looking" – referring to the new International Division at the FCA in this context.

FCA publishes Authorisation options under AIFMD; Fund structuring options and Collective versus individual portfolio management documents

The FCA has published explanatory charts linking to further information, such as its Handbook rules or legislative sources, on: Authorisation options under AIFMD; Fund structuring options and Collective versus individual portfolio management [20.04.18].

FCA's update on the impact of MiFID II and IDD on selling stakeholder products using basic advice and flagging its streamlined advice guidance

The FCA issued an update [19/04/18] on the basic advice regime in the context of MiFID II and IDD which also directs readers to its Finalised Guidance on streamlined advice for consumers. In the update the FCA flags that MiFID "Article 3 firms can no longer provide basic advice on stakeholder products within the scope of MiFID, under the rules in COBS 9.6." To give a personal recommendation on a stakeholder product that is also a MiFID financial instrument, the suitability rules in COBS 9A apply to such Article 3 firms. However, Article 3 firms and MiFID investment firms can "continue to provide basic advice" on non-MiFID stakeholder products and firms can provide streamlined advice on all MiFID and non-MiFID products.

The basic advice regime "is also not fully compatible" with the IDD according to the update. So the FCA "are making a similar change to the application of the suitability rules" preventing firms selling stakeholder products that are IBIPs under the IDD, using basic advice. The delay transposing the IDD means the FCA's final rules will apply from 1 October 2018.

The Financial Advice Market Review (FAMR) identified the need for streamlined advice in particular circumstances - such as where consumers have less wealth, or "simpler needs". The FCA is also aware consumers often seek advice "at particular trigger points in their life" or when they have a "specific need" – so "do not always want or need "full advice". Read more in our earlier update on the FAMR recommendations. The FCA flags its guidance on streamlined advice (FG17/8 [September 2017]) for which the FCA's suitability rules enable firms to consider only a "sub-set" of the client's needs and objectives.

FCA updates its regulated fees and levies rates proposals consultation

The FCA updated CP18/10, its regulated fees and levies rates proposals 2018/19 [12.04.18] in relation to insurers. The FCA seeks comments on CP18/10 by 1 June 2018. Read more on CP18/10 in our earlier update here.

US-UK Working Group on Financial Regulation

HM Treasury publishes a joint statement [19.04.18] on a US-UK Financial Regulatory Working Group in view of "the importance and prominence of US and UK financial markets and the transition in the UK's regulatory relationship with the EU due to Brexit". HM Treasury and the US Treasury Department as well as staff from relevant US and UK financial regulators will use the group for exchanging views on the US-UK regulatory relationship, and for regulatory co-operation. General objectives include: improving transparency, identifying potential cross-border implementation issues, and "working towards avoiding regulatory arbitrage and towards compatibility, as appropriate". The Group is expected to meet twice yearly. Bilateral contracts will remain for ongoing financial regulatory cooperation matters. Contains public sector information licensed under the Open Government Licence v3.0.


EU Regulatory

ECON's draft reports published on proposals for a regulation on prudential requirements for investment firms and for a directive on the prudential supervision of investment firms.

The European Economic and Monetary Affairs Committee (ECON) of the European Parliament published draft reports on proposals for a regulation on the prudential requirements for investment firms and for a directive on the prudential supervision of investment firms [11.04.18]. The proposals would amend relevant directives and regulations including CRD IV and the CRR, MiFID II and MiFIR.

ECON resolves "to further harmonise EU capital markets with long-term sustainable objectives" and adopts Draft Report on sustainable finance

Members of the European Parliament Economic and Monetary Affairs Committee (ECON) backed a resolution to harmonise EU capital markets further "with long-term sustainable objectives" and adopted a draft report on sustainable finance (2018/2007(INI). The Press Release notes that the MEPs in ECON asked the Commission "to establish a 'Green Finance Mark' by the end of 2019 that will recognise standards in sustainability that may help guide investment decisions". Other proposals noted in the Press Release include "pricing environmentally harmful assets according to their long term risk profile."

The draft report "insists that fiduciary duty should be extended to encompass a mandatory 'two-way' integration process whereby asset managers are obliged to consider ESG factors and clients are asked about their timeframe and sustainability preferences". It also "asks that stewardship form an integral part of the legal duties of investors to be reflected through disclosure of major holdings, engagement activities, the use of proxy advisers and the use of passive investment vehicles". The resolution follows the European Commission's Action Plan on sustainable finance. Read more in our earlier updates here. Some Member States have already adopted their own sustainable finance initiatives, including France and Sweden, the Press Release states.

European Parliament adopts Fifth Anti-Money Laundering Directive

The European Commission announced [19.04.18] that the European Parliament adopted the Fifth Anti-Money Laundering Directive (5AMLD). The Parliament has published the consolidated adopted text. The proposal contains rules on a range of areas so as to address some "emerging new trends" especially in the financing and conduct of terrorist groups, with a view to preventing use of the financial system for money laundering or terrorist financing. Measures proposed include:

  • establishing publicly accessible central registers of information on the beneficial ownership of legal entities;
  • extending AML and CTF rules in the 4th Anti-Money Laundering Directive (Directive (EU) 2015/849 EU) (4AMLD) to providers of virtual currency services and custodian wallet providers (see our earlier updates here);
  • improving the effectiveness of the Commission's list of high-risk third countries by taking a harmonised approach across the EU to business relationships and transactions with such high-risk third countries, primarily focussing on enhanced customer due diligence.

In addition to amending 4 AMLD the proposal would also amend Directive 2009/101/EC on coordinating company safeguards for the protection of the interests of company members and third parties.


Brexit

EU Vice-President delivers speech on Brexit and Europe's CMU intentions

Valdis Dombrovskis delivered a speech [24.04.2018] at the City Week 2018 event in London, focusing on the EU single market, Brexit and, in that context, the use of equivalence. Dombrovskis says the Commission is "working full speed to deepen and integrate capital markets across the EU" - as part of their "flagship project, the Capital Markets Union". He identified a range of proposals to this end, including for a Pan-European Personal Pensions Product to help to "put to more productive use savings that currently lie on low-interest saving accounts" and the Fintech Action Plan, "for a more innovative and competitive European financial industry" - citing regulatory sandboxes as an example. He also referred to the Commission's "intensive work on sustainable and green finance".

On Brexit, Dombrovskis said managing "the risks and uncertainties that emanate from this change" is their "number one priority". He identifies two risks here. This first relates to the withdrawal agreement and the uncertainty still surrounding it. Dombrovskis said his "message to all parties - firms and supervisors – is that they need to continue their work to prepare for all scenarios". While the Commission "is assisting where we can" and published notices "to help the industry identify the foreseeable consequences of losing the financial passport" it is ultimately for businesses to work out how Brexit will impact them.

The second risk Dombrovskis believes is related to the future relationship between the UK and the EU. "Up until now, the UK and the other EU Member States have managed risks jointly" he said "by setting common rules" enforced by the European Court of Justice". The result is "countries are willing to accept that operators from across the EU export financial services - and also risks - into their territory, without supervising those operators themselves" he said. As the UK will move away from a joint set of common rules, each side will have to introduce rules "to protect investors and ensure financial stability". Dombrovskis cited the EU's history of using equivalence – saying, "as of today, we have over 200 equivalence decisions benefitting over 30 non-EU jurisdictions". But there are some limits to equivalence and he noted particularly;

  • "equivalence decisions are and will remain unilateral and discretionary EU acts",
  • equivalence rules do not cover all the financial sector, and;
  • "equivalence is only possible if there is a close convergence of rules and supervision" so where there is divergence, the conditions necessary for equivalence fall away and the equivalence may change or be withdrawn.

He summed up by saying "equivalence is not perfect... But one should not make the perfect be the enemy of the good. Equivalence has proven to be a pragmatic solution that works in many different circumstances, and it can work for the UK after Brexit as well... Brexit is posing many challenges...It is my duty to encourage you to take steps to prepare for all scenarios".


Ireland - Investment Funds

Central Bank warns about the potential impact of Brexit on the Irish economy

Ed Sibley, Deputy Governor of Prudential Regulation at the Central Bank of Ireland (the "Central Bank") recently [19.04.2018] warned of the risks to investment firms of a "hard" Brexit, highlighting the potential impact to the financial services sector and the Irish economy. These sentiments were echoed by Michael Hodson, Director of Asset Management Supervision at the Central Bank [19.04.2018] when he stated that he "expects firms to continue to progress with their strategic and contingency planning for Brexit; and to have assessed the Brexit impact under a number of different scenarios".

Central Bank considers relaxing rules to boost active exchange traded funds ("ETFs") in Ireland

The Central Bank is considering relaxing portfolio disclosure rules for ETFs [23.04.2018] in a bid to make the jurisdiction more attractive. Managers typically have not launched ETFs in Europe, in part due to the chance that disclosing their portfolios daily could lead to rivals copying their investment strategy. The Central Bank is examining whether to amend the portfolio disclosure rules to "facilitate a broader range of investment strategies going through the ETF wrapper". Martin Moloney, special adviser on risk and regulation at the Central Bank, has indicated a decision will be made in the autumn of 2018.

Review of the Irish UCITS regulatory framework

The Central Bank published a consultation paper on [29.03.2018] which proposes to amend and consolidate the Central Bank UCITS Regulations. This consultation paper ("CP119") provides, amongst other amendments, for the following change to UCITS performance fee requirements:

"The amended regulations will include a requirement relating to the minimum frequency for crystallisation of performance fees in order to align the Central Bank's approach to the IOSCO Good Practices. In this regard, the new provision will specify that the minimum period for performance fee crystallisation is once per annum. A transitional period is also being provided for existing UCITS in respect of this requirement."

As such, there will be a restriction on paying a performance fee more frequently than on an annual basis. A transitional period will be available for existing UCITS funds that pay performance fees on a more frequent basis to permit them to adjust their performance fee payment timelines

Other amendments include:

  • Changes in relation to management company/depositary second set of semi-annual accounts;
  • Adjustments to depositary obligations;
  • Agreement requirements to reflect UCITS V;
  • Amendments in light of the Money Market Funds Regulation and CP86; and
  • New requirements in relation to temporary suspension.

The closing date for responses is 29 June 2018.


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