Investment management update

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.

On 10 May, the FCA published the results of its review of 14 firms’ fair value assessments under the Consumer Duty (which will take effect on 31 July). The findings include recommendations to firms to ensure their compliance with the fair value rules, such as collecting and monitoring evidence on fair value and setting clear mechanisms for remediation. On the same day, the FCA’s Executive Director for Consumers and Competition, Sheldon Mills, gave a speech on the implementation of the Consumer Duty and encouraged firms to review their fees and undertake a broader assessment of fair value. Mills also warned that the FCA will take strong action with firms that fail to comply. The measures that the FCA might undertake are disciplinary enforcement such as regulatory fines, investigations, and other interventions to address actual or potential harm to consumers.
On 19 May, the UK Government published the long-awaited Memorandum of Understanding (MoU) on Financial Services Cooperation. The Brexit agreement between the UK and the EU included a commitment to an MoU on financial services in the accompanying political agreement, rather than the legal text (the Trade and Cooperation Agreement). The MoU was agreed in March 2021 but was stalled, primarily due to the EU’s reluctance to formally adopt the MoU during ongoing tensions with the UK in areas such as the Northern Ireland trade border. The recently agreed Windsor Framework on Northern Ireland provoked hopes for closer cooperation. The UK’s publication of the MoU suggests that the EU might formally adopt the text soon. However, it is important to note that the MoU does not commit the two parties to mutual equivalence or enhanced access. Rather, it establishes a forum (based on the EU-US model) for ongoing discussions on matters of market access, regulatory divergence, and shared interests, without compelling either party to agree on substance.
On 24 May, the Financial Reporting Council (FRC) launched a consultation on the UK Corporate Governance Code. The FRC is consulting on proposed revisions to the code, including a reformed framework for prudent and effective controls that underpin reporting, improvements to comply-or-explain provisions, and changes to board and audit committee responsibilities in respect of ESG reporting.

On 24 May, the European Commission published a series of proposals as part of its Retail Investment Strategy package. The proposed reforms are wide-ranging but aim at increasing the level of retail investment in Europe. The proposals would amend MiFID II by introducing a value assessment requirement, partially banning inducements (for execution-only services) and making it easier to opt up clients to professional status; amending PRIIPs to improve the digital readability of Key Information Documents and addressing the disclosure of sustainability-related information; and amending UCITS and AIFMD to introduce the concept of “undue costs”, their assessment and remediation (emerging from an ESMA Opinion on the same, published on 17 May). Further amendments seek to improve product transparency, address marketing via social media, and improve supervisory cooperation.
On 24 May, ESMA published a final report on its Common Supervisory Action (CSA) with national competent authorities on the supervision of UCITS’ and open-ended AIFs’ asset valuation requirements. The CSA was undertaken in 2022 and the report concludes that there are several areas for improvement. These areas are the appropriateness of asset valuation policies and procedures; valuation under stressed market conditions; the independence of the valuation function and third-party valuers; early detection of valuation errors and transparency to investors; and a focus on private equity and real estate assets. The national competent authorities will take forward the recommendations and ESMA will facilitate discussion on certain areas, such as valuation under stressed market conditions.
On 23 May, ESMA published a consultation paper on the reformed ELTIF Regulation. The proposals comprise draft Regulatory Technical Standards (RTS) on areas delegated to ESMA under the completed Level 1 legislation. The consultation covers aspects of the ELTIF’s redemption policy, the new liquidity matching mechanism, costs disclosure, and the circumstances in which the use of a derivative is for hedging purposes. The consultation will close on 24 August. ESMA will submit final RTS to the European Commission for adoption by 10 January 2024.
On 16 May, the European Council adopted the Markets in Crypto Assets (MiCA) Regulation, following the European Parliament’s adoption of the same legislation. The regulations cover issuers and providers of crypto assets that do not qualify as financial instruments, including stablecoins and utility tokens. The completed legislation will soon be published in the EU’s Official Journal.
On 23 May, the EU’s institutions agreed the creation of a European Single Access Point (ESAP). The ESAP will be a single repository of financial and sustainability-related information about European companies in a user-friendly and digital format. The ESAP does not impose new reporting requirements on companies but will draw on disclosures such as the SFDR. The platform will be rolled out in three phases from mid-2027 comprising reporting on different regulations in each phase.
On 26 May, ESMA published a revised Q&A on the AIFMD, focused on the topic of whether non-EU AIFMs can undertake pre-marketing under the legislation. ESMA concluded that the AIFMD (as amended by the Cross-Border Distribution of Funds Directive) does not address pre-marketing by non-EU AIFMs. However, the Q&A clarifies that Member States may adopt local rules that allow non-EU AIFMs to pre-market funds within the Member State under a National Private Placement Regime (i.e. there is no passporting provision across the EU for non-EU AIFMs).

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Investment management update

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