Investment Management Update

A round-up of recent legal and regulatory developments of interest to the investment management sector.

This issue includes:


Investment Funds


The FCA confirms recognition of the FX Global Code and the UK Money Markets Code

The Financial Conduct Authority (FCA) has confirmed that it is recognising the FX Global Code and the UK Money Markets Code, the first such codes to be recognised. The FX Global Code sets global principles of good practice standards in the foreign exchange market and the UK Money Markets Code sets standards for the UK’s deposit, repo and securities lending markets. The codes will be recognised for three years, which can be extended by the FCA.

The FCA will not supervise firms or individuals directly against these codes in unregulated markets. Nonetheless, the FCA has confirmed that, for the purposes of the Senior Managers and Certification Regime (SM&CR), compliance with these codes will tend to indicate that a person is complying with the obligation to observe "proper standards of market conduct". The codes may also be used as evidence to determine what proper standards of market conduct were at a particular time. Finally, the FCA expects firms and individuals to consider the spirit and letter of the provisions of these codes in ensuring that they meet the obligation to observe proper standards of market conduct.

Advisory notice updated by HM Treasury on money laundering and terrorist financing controls in higher risk jurisdictions

HM Treasury has updated its advisory notice on higher risk jurisdictions for the purposes of the UK’s anti-money laundering (AML) and counter terrorist financing (CTF) regime. Under this regime, persons are required to apply enhanced customer due diligence (EDD) in any business relationship or transaction with a person established in a high-risk country. Persons are also required to take into account "geographical risk factors", including the recommendations of the Financial Action Task Force (FATF), in assessing whether there is a high risk of money laundering or terrorist financing.

In the notice, HM Treasury advises firms to consider the FATF’s recent publication which identifies countries which are deemed to have "strategic deficiencies" in their AML and CTF regimes and are therefore considered high risk or potentially high risk. Only the Democratic People’s Republic of Korea and Iran are deemed specifically to be "high risk". In respect of a number of other jurisdictions – including The Bahamas, Panama and Sri Lanka among others – firms are urged to minimise risks, which may include applying EDD measures. This advisory notice should be read alongside a firm’s AML and CTF framework and the relevant legislation when carrying out customer due diligence.

The European Commission proposes to amend the PRIIPs Delegated Regulation to align transitional arrangements for UCITS

Under Regulation (EU) No 1286/2014 (packaged retail and insurance-based investment products (PRIIPs) Regulation), UCITS management companies, UCITS investment companies and persons advising on, or selling, units of UCITS (together, “relevant persons”) are exempt from the obligations of the PRIIPs Regulation – including the requirement to produce a Key Investor Document (KID) – until 31 December 2019. Additional provisions provide that manufacturers of PRIIPs are permitted to rely on key investor information documents (KIIDs) prepared in accordance with the UCITS Directive instead of having to prepare a KID. 

The Council of the European Union has published the text of an amended Regulation which, amongst other things, prolongs this transitional regime until 31 December 2021. The European Commission has subsequently published a draft Delegated Regulation which would align these transitional arrangements by extending the time period in which relevant persons can rely on KIIDs until 31 December 2021.

The FCA SEC and CFTC release joint statement on the credit derivatives markets

The Chief Executive of the FCA, Andrew Bailey and the Chairmen of the Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC), J. Christopher Giancarlo and Jay Clayton respectively, have released a joint statement expressing concern about various opportunistic strategies in the credit derivatives markets and their impact on market integrity. This includes, but is not limited to, "manufactured credit events" (MCE). This follows on from Market Watch No.58 in which the FCA expressed concern about the effect of MCE on trust and confidence in the credit derivatives markets and stated that MCE may constitute market abuse in certain circumstances.

The joint statement does not commit to specific action but pledges each regulator to make collaborative efforts to explore their concerns and foster, amongst other things, transparency, accountability and investor protection in the credit derivatives markets.

The FCA publishes its perimeter report 2018/19

The FCA has recently published its first annual perimeter report in which it aims to provide clarity on the scope of its role and on particular issues which have arisen in the last year in respect of the "regulatory perimeter", the boundary which sets out the activities regulated by the FCA.

In the perimeter report, the FCA noted the following:

  • Investment consultants – HM Treasury intends to consult on bringing the services provided by investment consultants (firms which advise pension fund trustees on issues such as asset manager selection) within the FCA’s supervisory remit.
  • Cryptoassets – Reiterating what was said in the final report of the Cryptoassets Taskforce, HM Treasury intends to consult on the cryptoassets currently outside the regulatory perimeter later this year.
  • Financial promotions – The FCA is actively considering whether additional powers may be needed to police digital financial promotions and is developing and deploying automated tools for detecting online market developments. 

Investment funds

Investment Association proposals for a long-term asset fund structure

In its “2025 Vision” report, the Investment Association (IA) unveiled proposals for a new UK fund structure (the long-term asset fund or LTAF) to invest in illiquid assets, including real estate, infrastructure and private equity. The proposal envisages the LTAF as an open-ended structure, but without daily dealing: investor subscriptions and redemptions would occur “at appropriate time intervals” to reflect the more illiquid nature of the investment strategy. The LTAF is intended to provide high standards of investor protection, but is unlikely to be made available to general retail investors without requirements for advice or appropriateness tests. 

The main purpose of the LTAF would be to offer investors (in particular the defined contribution pensions market) access to less liquid asset classes, meeting their demand for different sources of income and return, while simultaneously providing a flow of capital to business and infrastructure projects looking for sustainable long-term finance. 

The IA will publish a detailed blueprint of the LTAF proposal later this year.