Investment management update - July 2023

08 August 2023

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 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.
  • 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.