Private funds regulatory update

The private funds regulatory update provides a practical overview of recent UK and EU financial services regulatory developments impacting private fund focused investment managers.

In this edition, we:

  • consider the approach taken by both the UK and European regulators to private fund managers who operate across the EEA and are therefore impacted by Brexit;
  • analyse 10 key ESG matters which private fund managers ought to consider in a rapidly changing area of regulation; and
  • review the upcoming SMCR obligations with which private fund managers will have to comply.

Brexit: what are the approaches of the UK and European regulators?

The UK government has until 31 December 2020 (the transition period) to agree the UK’s future relationship with the EU. Although the UK and the EU have entered into the Withdrawal Agreement, this only forms the basis of negotiations. As highlighted in our February briefing on the FCA’s Dear CEO letter, private fund managers therefore need to continue to monitor the negotiations and consider what actions they should be taking now in order to continue to operate in the EU after Brexit.

In the event that no deal is agreed at the end of this transition period, UK firms operating in the EEA, and EEA firms operating in the UK, will no longer be able to use their passporting rights. We set out below a summary of the approaches taken by the UK and European regulators to investment managers (including private fund managers) impacted by Brexit.

Is any form of transitional permissions regime likely to be available?


The UK will adopt a temporary permissions regime (UK TPR) at the end of the Brexit transition period. This will enable EEA firms that currently passport into the UK to continue operating in the UK while seeking full UK authorisation, if necessary.

EEA firms which have notified the Financial Conduct Authority (FCA) that they wish to make use of the UK TPR will be deemed temporarily to have permission under Part 4A of the Financial Services and Markets Act 2000, which will reflect a firm’s passporting permission on 31 December 2020. The UK TPR is expected to be in force for a maximum of three years, within which time firms will be required to obtain authorisation or recognition in the UK, if required. The notification window for the UK TPR is currently closed, although the FCA plans to reopen the notification window later this year (in time for firms to rely on the UK TPR once the Brexit transition period expires).


If the UK and the EU do not reach an agreement by the end of the Brexit transition period, the UK will be considered a third country state. As such, some European countries have adopted transitional permissions regimes in anticipation that the UK’s exit from the EU will be without a deal.

  • France has a transitional regime conditional on such a scenario. This regime would end the possibility for UK authorised investment managers to benefit from the same passport to manage funds established in France and to provide investment services in France. However, management delegations to third parties established in the UK will still be possible.
  • Spain has also approved contingency measures (Spanish TPR) that would continue to apply in the event of the UK leaving the EU without an agreement – these include: (a) allowing the orderly termination or assignment of contracts (in certain circumstances); and (b) the existing authorisation scheme being extended for nine months after the transition period to enable firms to apply to the appropriate regulator for authorisation.
  • Finland has adopted a temporary permissions regime which enables UK investment firms to continue providing services into Finland to professional clients/eligible counterparties within the scope of their existing licence, provided that they have applied for a third-country firm cross-border authorisation before the end of the transition period.
  • On 3 June 2020, the Danish regulator published a statement declaring that it will publish further information on the possibility for UK investment firms to apply for conditional and temporary licenses for the provision of investment services cross-border into Denmark. This suggests a possible temporary permissions regime in the future.

By contrast, both Norway and Germany currently only have transitional rules in place until the expiry of the transition period. In Norway, a transitional act provides that the UK is considered to be an EEA member state until 31 December 2020. In Germany, rules were introduced on 12 December 2018 whereby UK firms that have operated in Germany under the passport regime could be allowed to continue to provide certain services for up to 21 months (until 31 December 2020 at the latest). It is not clear whether the rules currently in force in Norway and Germany would continue to apply after the transition period.

Sweden, Italy, Luxembourg and the Netherlands do not have any transitional regimes in place after the end of the transition period.

As such, in the event that no deal is reached between the UK and the EU, UK firms will be required to comply with applicable national rules and will need to apply to the relevant regulator for authorisation as third country firms.

Is any other form of regulatory forbearance likely to be available post 31 December 2020?


Other than the UK TPR, there are no indications from the FCA that any other form of regulatory forbearance will be available for incoming EEA firms post 31 December 2020.

However, in its guidance for UK firms servicing EEA customers, the FCA suggests there may be some circumstances where it would be permissible for UK firms to continue servicing EEA customers where there may be significant consumer harm if a firm simply stopped servicing the customer. As such, although this has not been expressly confirmed, we would expect that it will be permissible, in certain circumstances, for EEA firms (who are not part of the UK TPR) with pre-31 December 2020 agreements to continue to service UK customers.


On 7 May 2020, the French government presented a bill on various provisions, including on the UK's withdrawal from the EU. The proposed bill seeks to introduce appropriate rules for the management of French collective investment schemes and equity saving plans whose assets must comply with investment ratios or rules.

By contrast, there is no indication that any other regulatory forbearance is likely to be available in other jurisdictions. It is generally considered, however, that it will be permissible to continue to service existing pre-Brexit agreements post-Brexit, provided that no new services/products are offered. As noted above, the FCA’s guidance for UK firms servicing EEA customers suggests there may be some circumstances where it would be permissible for UK firms to continue to service EEA customers although this has by no means been confirmed.

What is the status of communications between the regulator(s) and branches of firms/firms operating cross-border into a jurisdiction?


As outlined above, EEA firms will need to submit a notification to the FCA within the specified notification window in order to make use of the UK TPR. After 31 December 2020, firms who notified the FCA of their intention to use the UK TPR will be contacted and provided with a landing slot when they will need to submit their application to the FCA for full UK authorisation.


A number of local member state regulators have issued important Brexit-related communications.

  • In 2019, the Luxembourg regulator requested UK firms to notify it of their intentions regarding the provision of services in Luxembourg in the event of a no-deal Brexit and invited those entities that wished to continue to provide such services post-Brexit to file the required regulatory applications.
  • The Swedish regulator has informed Swedish branches of UK firms operating in Sweden that their regulated operations may not continue in the absence of any transitional regime and/or solution between the UK and EU.
  • The Spanish regulator is currently encouraging firms to adopt measures in case the UK and the EU do not reach a deal by the end of the transition period.
  • The German regulator has suggested that some UK firms may be able to apply for an exemption pursuant to section 2, paragraph 5 of the German Banking Act to provide certain services to a limited spectrum of clients (mainly institutional investors) on a cross-border basis into Germany.
  • In Italy, the regulators have recently delivered public “warnings” to all UK firms operating in Italy, illustrating the available options to firms to continue operating in Italy after the transition period. UK firms have been invited to notify the relevant regulator in relation to their Brexit plans in respect of their Italian operations.

Are there any common approaches or “work-arounds” being adopted by firms impacted by Brexit?


In our experience, a number of firms are looking to make use of the UK TPR with a view to adopting longer-term solutions during the window afforded by the UK TPR. Others are looking into the extent to which they may be able to continue to service UK located customers without undertaking regulated business in the UK (although any such approach needs to be carefully considered, with appropriate bespoke advice). Still, others have (or are looking to) create a UK regulated presence, whether through direct authorisation of a UK entity or branch or by using hosted solutions provided by third party service providers.


There is no single approach. However, one common approach is for firms to establish entities within an EEA jurisdiction to allow them to continue to make use of the passporting regime.

  • Sweden: many firms have re-located their operations and established a new Swedish branch from a new European hub such as Frankfurt, Luxembourg or Dublin.
  • Germany, Spain and Italy: firms have either (i) established a branch in the applicable jurisdiction, or (ii) in another EEA state, in order to provide financial services on a cross-border basis.
  • Norway and the Netherlands: the main approach has been to establish EU licenced entities in jurisdictions such as Ireland and Luxembourg, and to enter into delegation and insourcing arrangements.

We have also seen a couple of other approaches.

  • Denmark: entities can, depending on the type of service offered, obtain a license without the establishment of a Danish subsidiary (in the case of a license for the provisions of cross-border services for firms not targeting retail clients, or a license for the establishment of a branch).
  • Finland: firms impacted by Brexit are contemplating using outsourcing and/or dual hatting models, as permitted under the rules applicable to the EEA entity under its home state regulations/regulator.

Has any indication been provided as to likely enforcement action in 2021 against firms who have lost passporting rights, but continue to do business in the UK/EEA?


We are not aware of any such specific enforcement action in respect of EEA firms. However, if firms fail to make the UK TPR notification in time, they will not be able to enter into the regime and will only be able to operate in the UK post 31 December 2020 once they subsequently obtain full UK authorisation. Generally, operating without UK authorisation carries both criminal and civil penalties – and the FCA has a specific “unauthorised business” unit within its enforcement division, which is active in taking action against firms carrying on regulated business in the UK without appropriate licences in place.


We understand that the Spanish regulators will uphold a restrictive position towards UK firms and it will be difficult for UK firms to carry out activities in Spain in the case of a no deal Brexit. Under the Spanish TPR, the Spanish regulators may require entities to provide any documentation, information or to carry out any necessary actions. If the request is not satisfactorily met, the Spanish regulator(s) may waive the nine-month extension period with respect to the firm concerned and the firm will be subject to the penalty regime under Spanish law applicable to the unauthorised exercise of reserved activities.

In other European jurisdictions, there has been no specific indication of any enforcement action beyond a regulator’s usual approach to any firms who carry out services without the appropriate authorisation. Generally, operating without appropriate authorisation in the applicable EEA jurisdiction could result in sanctions from courts, civil and/or criminal liability. Given the length of time UK firms have had to prepare for Brexit, it is likely that UK firms operating without appropriate licences will be scrutinised – for example, certain communications from the Danish and German regulators create an expectation that they will take enforcement action against firms operating without appropriate licenses. Similarly, based on the “warnings” given by the Italian regulator, any UK firm continuing to operate in Italy without an appropriate licence would be regarded as an unauthorised operator, which could trigger criminal and civil liability.

ESG – 10 things private fund managers should be thinking about

Environmental, social and governance (ESG) issues are already an important consideration for many private fund managers in part because the regulatory landscape is changing rapidly in respect of ESG. We highlighted some of the ESG considerations which private fund managers ought to take into account in our February briefing on the FCA’s Dear CEO letter.

In order to assist private fund managers in navigating this increasingly complex landscape, we have set out below 10 key ESG matters for private fund managers to consider. As part of this, we discuss how private fund managers can implement ESG considerations in their organisation and that of their portfolio companies and reflect on how the ESG landscape may be shaped by the Covid-19 pandemic and Brexit.

1. What is ESG?

ESG encompasses a broad range of factors against which investors can assess entities. ESG focuses on the potential for a company to have a positive impact and create value in the long term through good corporate behaviour.

ESG factors can include:

  • environmental: climate change, waste, pollution, emissions and deforestation;
  • social: modern slavery and human trafficking, employee relations, health and safety, community engagement and inequality; and
  • governance: bribery, corruption and anti-money laundering, diversity at employee and board level, financial and corporate reporting, executive pay and board governance and gender pay gap.

Previously, the implementation of ESG has predominantly been a voluntary process. Investors will often consider ESG factors in their investment processes not least because investments into companies who score highly in ESG, often outperform the wider market and can provide an indication that a company is well managed and sustainable in the long term.

However, as will be discussed in more detail below, there are developments that will incorporate the concept of ESG into the current regulatory framework for private fund managers.

2. Investor demand and the danger of “greenwashing”

For private fund managers that make use of ESG ratings, we have seen examples of side letters from investors that set out very specific ESG requirements, including provisions relating to the production of an ESG annual report. We also consider that it would be safe to assume that the level and the sophistication of due diligence being undertaken with respect to these sustainable funds is likely to increase.

Enhanced investor scrutiny shines a light on the dangers of greenwashing. The concept of greenwashing is the process of companies engaging in marketing or implementing a public relations strategy to give the appearance of alignment with ESG goals. This issue is quickly rising up the agenda as can be demonstrated by the speech given by Stephen Maijoor, ESMA Chair, earlier this year, criticising the lack of public scrutiny of ESG ratings and the lack of clarity on the methodologies underpinning their scoring mechanisms and diversity. 

3. Covid-19

As a result of the Covid-19 pandemic a spotlight is being shone on the “S” in ESG. FCA regulated firms are being assessed on their ability to provide adequate systems and controls to enable them to continue to meet their regulatory obligations in light of increased remote working. 

In addition to these house-level concerns for private fund managers, investee businesses will also have to consider carefully board remuneration in the context of a difficult economic environment and possible layoffs and the general protection of cash reserves. This tension may also be increased for firms which have placed ESG at the heart of their business strategy and public statements.

The Covid-19 pandemic has also presented challenges from a governance perspective. We previously mentioned in a briefing that ESMA provided some relief with respect to telephone recording obligations. However, this does not mitigate against the challenges that remote working places on the supervision of work and board meetings for example, particularly when some employees may be splitting their time between the office and remote working.

4. Impact of Brexit on ESG

At the time of writing, the UK has held off on committing to the implementation of the EU Taxonomy Regulation, which aims to establish a framework setting out uniform criteria for determining the environmental sustainability of an economic activity using an EU-wide classification system.

This regulation is due to come into force whilst the UK is still in the Brexit transition period although the (level two) technical standards, which substantively implement the regime, have yet to be published. The UK Government has indicated that it does not as yet want to be bound to the regime, although the UK is pursuing similar policy outcomes with the EU. We expect that the rules will be implemented substantively in the UK but there remains the possibility that private fund managers based in the UK may have to deal with conflicting regulatory regimes when dealing with the UK regime or (for example) the regime which applies to European investee companies.

5. Horizon scanning and key developments that may impact private fund managers

We set out below a summary of the EU regulation that may have an impact on private fund managers or the companies in which they invest. This suite of regulation flows from the EU Sustainable Action Plan which was published in 2018.


Disclosures Regulation

Taxonomy Regulation

Sustainability Delegated Regulation

UCITS and AIFMD Level 2 Measures


Imposes new transparency and disclosure requirements on “financial market participants” which would include private fund managers and “financial products” and requires the integration of sustainability risks in financial market participants' investment decision-making processes.

Establishes a framework setting out uniform criteria for determining the environmental sustainability of an economic activity. This is an EU-wide classification system.

Integration of sustainability into organisation requirements and integration of sustainability preferences into suitability process.

Sustainability risks and factors to be taken into account by AIFMs and UCITS management companies.


Applies from 10 March 2021.

European Supervisory Authorities currently developing Level 2 measures – consultation due to close on 1 September 2020.

Published in the European Journal on 22 June 2020 and enters into force on 12 July 2020.

Applies from 1 January 2022 for certain Articles and other Articles to apply from 1 January 2023.

Draft published by the European Commission on 8 June 2020 – open to public consultation until 6 July 2020.

Draft builds on the final report of the European Securities and Markets Authority (ESMA) and draft delegated acts published in April 2019.

Draft act published by the European Commission on 8 June 2020 – open to public consultation until 6 July 2020.

Draft builds on ESMA’s final report and draft delegated acts published in April 2019.


We have also set out below some UK publications and developments which may have an impact on private fund managers or the companies in which they invest.




Green Finance Strategy

Proposals for green finance at the heart of delivering the UK’s clean growth strategy, 25 year environment plan and industrial strategy.

Published in July 2019

PRA/FCA Climate Financial Risk Forum

Four technical working groups on disclosure, scenario analysis, risk management and innovation.

Created in March 2019

DP18/8 and FS19/6: FCA on climate change and green finance

Future work on climate change and green finance, for example, the issue of greenwashing and TCFD aligned disclosures for listed companies.

FS19/6 published in October 2019

DP 19/1 and  FS19/7: Building a regulatory framework for effective stewardship

Considers how firms can most effectively integrate climate change and other ESG factors into their investment activities.

FS19/7 published in October 2019

FRC Stewardship Code 2020 (revises 2012 version)

12 principles for asset managers and owners, six principles for service providers supported by public reporting expectations. Signatories are expected to integrate ESG factors with investment.

Published in October 2019


6. Approach of the regulators

ESG is a high priority for regulators, with the FCA pushing ahead with a number of ESG initiatives and consultations. However, there is evidence to suggest that this may have slowed as a result of the Covid-19 pandemic, given that, for example, their consultation deadline relating to existing disclosure obligations has been extended from 1 June 2020 to 1 October 2020.

There may, however, be some flexibility in the technical rules produced by the FCA for firms that are pursuing ESG objectives. For example, in the FCA's response to Covid-19 and expectations for 2020 the FCA discusses the provision of mental health counselling to advisers of other firms and stated that they would not consider this an inducement or contrary to the conduct of business rules.

7. Embedding ESG into portfolio companies

For private fund managers that have signed up to the Stewardship Code there is an expectation that firms provide a statement, on an “apply and explain” basis, as to how they have engaged with investee companies on issues such as climate change and wider systemic risks.

Private fund managers who are not subject to the Stewardship Code may nevertheless wish to enter into conversations with the management teams of their existing portfolio companies to discuss their ESG obligations. This could protect against both reputational risk and the compliance risk whilst generating long term value as the market reacts to a changing world.  

8. ESG at board and C-suite level

For portfolio companies where ESG is a key issue, private fund managers should look to confirm that the portfolio company has the correct structure, composition and processes to identify and understand the ESG risks and opportunities that are material to its business.

It is equally important that private fund managers ensure that funds can proactively monitor management’s handling of these issues. Therefore, private fund managers may wish to identify a small number of core ESG issues that are strategically important to their portfolio companies, which would enable the private fund managers to track their performance.

9. ESG policies and procedures

All private fund managers ought to undertake, at fund level, a review of their ESG policies in light of the incoming Disclosure Regulation. This could include statements relating to how ESG issues are incorporated into their investment analysis and decision making process and provide an explanation as to how they obtain appropriate disclosure on ESG issues by their portfolio companies.

We anticipate however that a number of portfolio companies will find themselves at a much earlier stage in their ESG journey. For these businesses, we would encourage them to consider developing a tailored ESG policy which covers the ESG risks that are material to their business.

10. Disclosures in fund documentation

Partly to combat greenwashing, the Disclosures Regulation comes into force in March 2021. This will apply to financial market participants, which includes private fund managers pursuing any strategy, including those that do not market products that are “ESG-friendly”, although there are more onerous obligations for funds that have sustainability characteristics or objectives.

Firms must include in their pre-contractual disclosures an assessment of the likely impacts of sustainability risks on their financial products and information on how sustainability risks are integrated into investment decisions. Firms that do have products that have sustainability characteristics must describe how those characteristics are met and explain how the benchmark index referred to, is consistent with those characteristics.

Embedding SMCR: What should private fund managers do next?

The Senior Managers and Certification Regime (SMCR) came into force for FCA solo-regulated firms, such as private fund managers, on 9 December 2019. As such, private fund managers were required to put in place arrangements to comply with the majority of SMCR requirements by this date. This links back to the FCA’s increased emphasis on governance, as highlighted in our February briefing on the FCA’s Dear CEO letter.

As part of SMCR implementation, the FCA previously introduced a 12-month transitional period for some, rather crucial, aspects of the SMCR, including assessments of fitness and propriety for Certified Staff.

However, on 30 June 2020, the FCA published a press release announcing that, in light of Covid-19, HM Treasury had agreed to extend the deadline for solo-regulated firms (such as the vast majority of private fund managers) to undertake the first assessment of the fitness and propriety of their Certified Staff from 9 December 2020 until 31 March 2021. Private fund managers must therefore ensure that all fitness and propriety assessments for such staff are completed and that certificates are issued to those Certified Staff assessed as fit and proper, by the end of 31 March 2021.

The FCA states that firms should continue with their Conduct Rules and certification implementation programmes and, if they are able to certify staff earlier than 31 March 2021, they should do so. The FCA highlights that private fund managers should not wait to remove staff who are not fit and proper from certified roles.

In its announcement, the FCA also confirmed that, to ensure SMCR deadlines remain consistent and to provide additional time for firms that need it, it intends to consult on extending the deadline for the following SMCR requirements from 9 December 2020 to 31 March 2021.

The date the Conduct Rules come into force

Depending on the outcome of the parliamentary process and the FCA’s consultation, private fund managers may have until 31 March 2021 (rather than 9 December 2020) to ensure that staff, who are subject to the Conduct Rules and are not Senior Managers or Certified Staff, have received training on the Conduct Rules. Private fund managers must make sure that such training is sufficiently tailored to ensure that all relevant staff understand how the Conduct Rules apply to them and their role. The FCA states that it will produce further communications about its expectations in due course.

The deadline for submission of information about Directory persons

Private fund managers will need to report information about specific persons to the FCA. The initial deadline for this to be completed was 9 December 2020. However, given the FCA’s announcement, it is possible that private fund managers may only need to report the required information to the FCA by 31 March 2021.

The information supplied to the FCA is for the purpose of uploading this information to the FCA’s new register, the Directory. Private fund managers will need to report relatively comprehensive information about the following:

  • all Certified Staff;
  • directors who are not performing Senior Manager Functions (SMFs) – both executive and non-executive; and
  • other individuals who are sole traders or Appointed Representatives (including those within Appointed Representatives) where they are undertaking business with clients and require a qualification to do so.

The information to be reported includes, amongst other things, the role the person performs, any qualifications which the person holds and their workplace location.

The FCA also notes that it will still publish details of Certified Staff starting from 9 December 2020 on the Financial Services Register. Where firms are able to provide this information before March 2021, the FCA encourages them to do so.

The ongoing Covid-19 pandemic could potentially have further impacts on the timing of the implementation of these changes and we have covered the impact of Covid-19 on the FCA’s expectations on the SMCR in a previous update. However, the extension of the deadline for fitness and propriety assessments (as well as potential additional extensions) should provide some welcome relief for private fund managers.