Investment management update

UK

• On 28 February, the UK’s financial regulatory authorities published an updated Regulatory Initiatives Grid. Among many planned changes to financial regulations, the document states that the Government will soon publish a revised Green Finance Strategy; the FCA will consult in the summer on a draft code of conduct for ESG data providers that will be finalised in the fourth quarter of 2023; the FCA will consult on integrating the ISSB global sustainability reporting standards into the UK’s rules in the final quarter of 2023 and a policy statement will be published in 2024 (see the ISSB item below); the FCA will consult on standardising asset managers’ voting disclosures in the second quarter of 2023; the FCA will consult on the Overseas Fund Regime during the course of 2023; final rules on the distribution of the LTAF to retail investors will be issued in the first half of 2023; and a policy statement on liquidity management in open-ended real estate funds is likely to be published soon.
• On 28 February, the Competition and Markets Authority (CMA) published a consultation about the application of competition law on sustainability agreements between businesses. The CMA intends not to undertake enforcement actions against businesses that collaborate via climate change agreements to help the UK achieve its statutory net zero emissions targets, subject to meeting certain conditions. The CMA seeks to reassure businesses concerned about the risk that anti-competition laws might be breached by such agreements. Other jurisdictions, such as Germany and Japan, are similarly considering their legal approach to acceptable collaboration between businesses on climate change matters. The CMA’s consultation will close on 6 April.
• On 27 February, the FCA published the results of its multi-firm review of the implementation of the Investment Firms Prudential Regime (IFPR). The review includes observations on the ICARA process and reporting, such as the application of the rules to individual firms within a group. The multi-firm review will continue and the FCA will publish a concluding report on its completion, and further interim conclusions will be published if deemed appropriate.
• On 24 February, the FCA published its policy statement on the UK’s EMIR REFIT reforms, and draft rules on validation for EMIR reporting (based on ESMA’s rules). The changes outlined in the Policy Statement will take effect on 30 September 2024 (while the EU’s rules will take effect on 29 April 2024). Feedback is requested on the FCA’s draft validation rules by 24 March 2023.
• On 20 February, the FCA published a Discussion Paper (DP23/2) on ‘Updating and improving the UK regime for asset management’. The consultation is wide-ranging and intentionally speculative, including ideas for reforms to the FCA’s Handbook rules for retail and private funds (including the potential creation of a single asset management handbook); specific changes to rules such as the AIFMD and the thresholds for AIFMs; reforms to the UCITS and NURS retail regime; and considerations on how to adapt and future-proof the regime for technological change. The consultation was provoked by the Financial Services and Markets Bill, which is currently being considered in the House of Lords and which is expected to receive Royal Assent this year. Among other changes to the UK’s regulatory regime, the legislation will require the FCA and PRA to review all onshored EU legislation and to adopt, amend, or scrap the rules in relation to their regulatory handbooks. The FCA’s consultation will close on 22 May.
• On 10 February, the FCA published a Discussion Paper (DP23/1) on “Finance for positive sustainable change”. The consultation contemplates the introduction of an FCA regime in respect of ESG governance, risk management, incentives and remuneration, and training and competency within regulated firms. The UK’s regime would be separate to and distinct from the EU’s requirements introduced via amendments to MiFID II, UCITS, and AIFMD regimes. The FCA’s Discussion Paper will close for feedback on 10 May.
• On 7 February, the Bank of England and HM Treasury jointly published a consultation on the creation of a digital pound. The paper explores the authorities’ proposal for a central bank-issued digital currency, and the issues surrounding it including monetary and financial stability considerations, operational models, and demand for the currency. The consultation will close on 7 June.
• On 3 February, the FCA published a portfolio letter to asset management CEOs on the implementation of the Consumer Duty. The letter highlights the FCA’s timeline and expectations for delivery, the results of its recent multi-firm review, and its planned approach to supervising compliance with the regulations.
• On 3 February, the FCA also published a broader portfolio letter to asset management CEOs on its supervisory priorities for the sector. The FCA highlights product governance, ESG, product liquidity, operational resilience, financial resilience, and the FCA’s intention to consult on reforms to the asset management regime (see the relevant item above).
• On 6 February, the FCA published a statement on the marketing of cryptoassets to UK retail investors. The FCA addresses an exemption for cryptoasset businesses that are not authorised persons but are registered with the FCA under money laundering and terrorist financing requirements, to enable those firms to market crypto-assets as financial promotions. The FCA’s statement follows HM Treasury’s statement on 1 February that accompanied the consultation covered in the item below.
• On 1 February, HM Treasury published a consultation and call for evidence on a regulatory regime for cryptoassets. The Government proposes to incorporate cryptoasset-related activity within the Financial Services and Markets Act, rather than create a separate legal framework. This would bring firms and activities within the regulatory perimeter and subject to various existing regulations. The consultation will close on 30 April. Separately, the UK Jurisdiction Taskforce of LawtechUK published a legal statement on the issue and transfer of digital securities under English law.
• On 1 February, the UK’s Climate Change Committee published a report calling for the imposition of mandatory climate adaption plans on companies and financial institutions. The report concludes that there has been a lack of necessary investment in adaptation and criticises political and business leaders for being slow to act. The report finds that only a small amount of the capital raised in green gilts and bonds was used to finance adaptation to physical risks. The committee also criticised the treatment of adaptation in the TCFD disclosure framework as comprising “rudimentary assumptions” in scenario planning. The report praises the UK’s financial regulators’ work on ESG but deems the FCA’s proposed Sustainability Disclosure Requirements to be insufficient for addressing adaptation. The committee’s proposed mandatory plans would include the measurement and management of physical risks and would exist alongside firms’ net zero transition plans (which are a priority for the FCA this year). The UK Climate Change Committee is an independent public body that was established to advise the Government on achieving its statutory net zero commitment.

Europe ex UK

• On 28 February, the European Parliament and the European Council reached a political agreement on standards for green bonds. European Green Bonds (EuGB) must invest their proceeds in activities that are aligned with the EU’s Green Taxonomy and aim to be a ‘gold standard’ for green bond issuance. Broader disclosure requirements for green bond issuers will remain voluntary (as supported by ICMA that oversees the voluntary framework). The legislation will be formally adopted soon and will apply a year after publication in the EU’s Official Journal.
• On 22 February, the European Council published the legislative text on ELTIF reform that it has agreed with the European Parliament. The Council recommended that Member States formally sign off on the ELTIF Regulation. The European Parliament voted to approve the text on 15 February.
• On 20 February, the SFDR Regulatory Technical Standards (RTS), updated to include reporting of nuclear and natural gas activities for Article 8 and Article 9 funds, entered into force. In precontractual and periodic disclosures, firms must disclose whether their funds invest in those activities and, if so, the percentage of the investment in Taxonomy-aligned nuclear and gas activities.
• On 8 February, ESMA published its latest Trends, Risks, and Vulnerabilities report, the first edition of the bi-annual report in 2023. ESMA cited data on the reclassification of funds under the SFDR and warned that the “misuse of SFDR as a marketing tool” could lead to greenwashing. The report notes that the SFDR does not include the requirements that typically accompany a fund labelling regime, echoing EU policymakers’ frequent contention that the SFDR is intended to be a disclosure regime. On 13 February, the French AMF publicly called on the European Commission to transform the SFDR into a labelling regime to improve investor clarity and confidence and to prevent greenwashing. The AMF’s statement was part of a publication outlining proposed minimum environmental criteria for funds that are classified as Article 8 or Article 9. The AMF proposes that those funds should have a sustainable investment objective or to consider the relevant environmental factors.
• On 3 February, ESMA published updated Q&As on the application of the UCITS Directive. The update includes a new response on issuer concentration.

International

• The TCFD issued a survey in late February for asset managers and asset owners to respond on their climate reporting practices. The results will inform the TCFD’s 2023 status report on climate-related reporting, practices, and challenges. The deadline for response is 3 April.
• On 23 February, the Loan Market Association (LMA) published its updated Green, Social, and Sustainability-linked Loan Principles and its accompanying guidance. The updates seek to reflect market developments and to ensure the integrity of ESG products. Transactions completed prior to 9 March are exempt from the updated standards. In addition, on 16 February, the European Leveraged Finance Association (EFLA) published an insights report into the evolution of sustainability-linked provisions in debt markets. The EFLA intends to update its insight report to reflect the implementation of the LMA principles and guidance.
• On 20 February, the FSB published a letter to the G20 Finance Ministers and Central Bank Governors about its work priorities for the coming year. The letter highlights non-bank financial intermediation (including liquidity mismatches in open-ended funds and money market fund reform), cryptoassets, cross-border payments, operational and cyber resilience, and climate-related financial risks. On 16 February, the FSB also published an assessment of the financial stability risks posed by decentralised finance.
• On 17 February, the ISSB board signed off on its first two corporate sustainability disclosure standards. The framework aims to provide a global baseline for companies’ ESG disclosures, and the UK Government intends to incorporate the standards within its Sustainability Disclosure Requirements. Australia is considering whether to do likewise. The signed off drafts refer to existing reporting metrics, GRI and the EU’s European Sustainability Reporting Standards (ESRS). IOSCO, on behalf of the world’s securities regulators, issued a statement welcoming the completion of the standards. The G20 discussions between finance ministers also referred to the finalisation of the standards. The final ISSB standards are due to be published by Q3 2023 and to be ready to take effect from the financial year beginning in 2024.