Investment Management Update
- ESMA opinion on UCITS share classes
- FSCP paper proposing a duty of care for financial services providers
Following the issue of discussion papers in December 2014 and April 2016 on UCITS share classes, in which it noted divergence in national practices as to permissible types of share classes, the European Securities and Markets Authority (ESMA) has now publish an opinion advocating common principles for setting up share classes in UCITS funds.
ESMA has highlighted in the opinion that, whilst UCITS can be sold to retail investors across the EU, there is currently no common framework for share classes. ESMA’s opinion, addressed to national regulators, provides four principles for a more harmonised approach to share classes across the EU:
- Common investor objective – share classes of the same UCITS should have a common investment objective reflected by a common pool of assets. ESMA considers that different hedging arrangements at share class level (aside from currency risk hedging) would be incompatible with this principle.
- Non-contagion – managers of UCITS should implement procedures to ensure that risks associated with a particular share class will not adversely impact another share class.
- Pre-determination – features of a particular share class should be pre-determined before the share class is set up to allow investors to gain a complete overview.
- Transparency – in cases where there is a choice of more than two share classes, information on differences between share classes and risks (including contagion risks) should be made available to investors.
In order to mitigate the impact on investors in existing share classes which do not comply with these principles, ESMA has taken the view that these share classes should be allowed to continue. However, ESMA has made clear that such share classes should be closed for investment by new investors within six months of publication of the opinion, and for additional investment by existing investors within 18 months of publication.
The Financial Services Consumer Panel (FSCP) has published a position paper proposing amending the Financial Services and Markets Act 2000 (FSMA) to require the FCA to make rules specifying what constitutes a reasonable duty of care that financial services providers should owe to their customers.
The duty of care is aimed at bridging the gap between the FSMA principles that firms should “treat customers fairly” (TCF) and the wish that consumers should “take responsibility for their decisions”, in order to better protect retail and smaller businesses. FSCP considers that currently there are no practical measures preventing firms from mis-selling products and services to consumers, and indeed once these practices have been identified after the event, consumers are faced with an arduous battle through the Financial Ombudsman Service (FOS) to get compensation.
The primary purpose of the proposed duty of care is to operate as a preventative measure that would oblige providers of financial services to avoid conflicts of interest, act in the best interests of their customers, and to address the imbalance of information and bargaining position between firms and consumers.
The FSCP proposes that the FCA amend FSMA to make rules on a duty of care, but leaves to their discretion the precise scope of this. The FSCP envisages that the rules would be flexible and dependent on the complexity and risk of the product being sold. The riskier the product, the more stringent the duty of care on the provider to ensure that the product was suitable for the relevant consumer, and to ensure that the consumer understood what they were buying and the risks involved, particularly with regard to retail consumers and small businesses. It should be noted that this proposed duty of care will not affect the broad definition of “consumer” in FSMA and therefore would apply to both wholesale and retail businesses.
The FSCP hopes that a duty of care would engender long-term cultural change in financial providers in so far as it would bring greater clarity to the rules governing the relationship between consumers and firms, and operate as a deterrent to poor conduct towards consumers.