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Quarterly Regulatory Update May 2023

The start of 2023 has shown no signs of slowing down in pace, with a plethora of new and implementing regulatory developments taking up space on investment firms’ agendas. In this update, we will look specifically at regulatory updates relating to client disclosures, sustainable investment, and key developments both in the UK market and the EU. From the UK perspective this is a big year, which requires the regulator and market to decide on EU Rules it wants to keep, and those to amend or remove. From the EU perspective, the majority of focus still sits on driving forward the sustainable finance agenda.

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Putting Consumers at the Heart of Disclosures

Post-financial crisis, there has been a strong focus on investor protection across Europe from the regulatory perspective. The aim has been ensuring that end consumers are considered throughout the product lifecycle, and through appropriate communications that firms make.

A key focus over the past 12 months has been the ongoing use of the PRIIPs Key Information Document1 and where the future may lie. In our previous update, we highlighted that the UK would diverge from the EU and move away from the PRIIPs KID. To enable this, consultation papers were issued by the UK HM2 Treasury and FCA3 in December (FCA Discussion Paper 22/6), which closed on 3rd March 2023.

So, what do we expect to see from the UK FCA in relation to a future disclosure regime? The UK Investment Association, has proposed five principles for reform in its response:

  1. Communication should be built around the needs of the customer.
  2. Disclosure that is proportionate to what the investor is purchasing and consistent across similar products and wrappers.
  3. Recognition that a one-size fits all approach across different products does not work, and the need for comparability is not absolute.
  4. An element of standardization around key metrics is important, notably charges and costs, risk, and performance.
  5. Greater emphasis on the use of technology to support communication; firms should be able to communicate in the way they see fit for a customer rather than a prescriptive durable medium.

Naturally, there is a driver to ensure consumers are at the forefront of all communication which we have seen, and will touch on later, with the upcoming changes to the UK Future Regulatory Framework, and Consumer Understanding outcome of the FCA Consumer Duty. There is no surprise that the industry would like to ensure a less prescriptive, and more tailored approach, to the way in which they engage with investors. There is still a long way to go, however, and we don’t expect to see the next stage in the process (a consultation paper from the FCA) until summer. What is clear though is that the industry wants more flexibility and the PRIIPs KID in the UK will be ‘no more’.

The 1st of January 2023 saw the effective date for UCITS4 products to adopt the PRIIPs KID in Europe. A mammoth task for investment firms to meet the new calculation methodologies for performance and risk, as well as ensuring validation that the KID documents were appropriate and timely. This has been a challenge for a number of firms; however Broadridge was delighted to continue its success in being able to meet the reporting requirements for UCITS KIID5 and PRIIPs KID6 production and filing ahead of the 2023 deadline.

A point to be aware of, however, is the spectre is still looming in the EU, in the guise of the EU’s Retail Investment Strategy. The aim is to promote more transparency, simplicity, fairness, and cost-efficiency for retail investment products across the internal market. A call for evidence was requested by the European Commission in 2022, with some critical feedback received on the existing PRIIPs KID. Initiatives like Better Finance, and Insurance Europe, have highlighted how misaligned and potentially misleading a PRIIPs KID can be. It certainly feels that there is further change to come to EU PRIIPs.

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The Future of the UK Regulation

There has been significant activity from the FCA relating to the ongoing function of the UK asset management market. Importantly, on 9th December 2022, HM Treasury published its policy statement on building a smarter financial services framework for the UK. Together with the Government and the other UK financial services regulators, the FCA will also be implementing the outcomes of the Future Regulatory Framework (FRF) Review. December 2022 further saw the Edinburgh Reforms published, with an initial view to making client disclosures more efficient and investor specific under DP22/6: Future Disclosure Framework. As part of this wider exercise, we expect several discussion papers, consultations, guidance, and policy to follow throughout 2023.

So, what was the key development in quarter one of calendar year 2023? On 20th February, the UK FCA released ‘Discussion Paper 23/2: Updating and improving the UK regime for asset management’, with the aim to “set out ideas about how we might look to improve asset management regulation with a more modern and tailored regime, better meeting the needs of UK markets and consumers”.

Below, we outline the four areas of the discussion paper and the key points therein:

1. The structure of the regulatory regime – what can be simplified or restructured?

The FCA has highlighted that the current Rules may not be clear and coherent, or proportionate to the risk of harm in the market. They have proposed the following:

  • Consolidated Rules for asset managers – asset managers may be subject to three pieces of EU legislation in UCITS, AIFMD7, and MiFID8. The FCA is considering the possible creation of a single rulebook, however is conscious of potential costs and disruption to firms.
  • Retail focus – The FCA is considering moving the boundaries between the UCITS and NURS9 regime, or whether there should be boundaries at all. This could include the creation of UCITS plus, or potentially a ‘basic’ fund range.

2. Improving the way the regime works

The FCA is considering the potential to modernize and clarify the Rule set where existing rules may not lead to good investor outcomes. They have made the following proposals:

  • Clarifying the role of the host-AFM10 – an area of close consideration by the FCA where they will look to clarify expectations between parties, develop guidance, and set minimum contract requirements.
  • Liquidity management and investment due diligence – a stronger requirement for liquidity stress-testing however potentially moving Rules to guidance.
  • Fund Rules – eligible assets and, prudent spread of risk. The FCA is seeking opinion on whether to give clear guidance on the permitted 10% of UCITS assets that do not meet eligible markets criteria, and their interplay with liquidity requirements.

3. Technology and innovation alignment

There is consideration for amending fund rules to support tech changes to modernize fund propositions. The FCA has made the following proposals:

  • Consumer Outcomes – the FCA is looking for firms to think about how technology can improve consumer experience, drive competition, whilst considering investor protection;
  • Fund Tokenization – the FCA is continuing to explore the potential for a ‘digital register’, which would allow for tokenization of units in an authorized fund.
  • Fund operations tech – the DP11 highlights the discussions between the Investment Association and FCA to consider a new dealing model, with the potential for consultation on new Rules.

4. Rules could be revised through developments in technology, to improve investor engagement

The FCA is considering enhancing post-sale information that fund managers give to investors and the wider market about the fund and its activities, and how retail investors interact with the fund manager. The proposals include:

  • Prospectus revisit and digital Report and Accounts – the FCA concedes that the Prospectus may not be fulfilling its’ potential and a revamp may be required. Alongside the Prospectus, the Report and Accounts may also be changed in terms of prominence and accessibility to ensure essential elements are presented clearly and concisely.
  • Enhancing investor engagement – the FCA is considering how technology can help with attendance and participation at unitholder meetings, and better interaction between the fund manager and fund investors, despite an intermediated distribution chain.

Despite the potential far reaching changes that could transpire from the FCA discussion paper, it should be noted that this is still very much up for debate, rather than confirmed changes to the regulatory environment. Positively, the FCA highlight the requirement to keep open dialogue with other regulators, so hopefully we will not see a standalone regulatory regime which would likely increase cost and complexity for firms that operate in multiple jurisdictions. Responses for the discussion paper are due by 22nd of May 2023, and any significant output will likely be published late summer. 

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Consumer Duty: Understanding What Consumers Understand

As we have highlighted in recent publications, the FCA Consumer Duty has been in full swing to achieve implementation for manufacturers as of the end of April. This covers investment managers that manufacture, co-manufacture, or distribute products directly, or indirectly, to retail investors in the UK; it is somewhat of an all-encompassing scope! Firms are currently working hard to put in place the four outcomes and ensuring the cost-cutting measures are appropriate to meet the FCA’s new Consumer Duty principle. One of the key challenges for firms is the Consumer Understanding outcome, and how to evidence those expected good outcomes for consumers.

So, what does the Consumer Understanding outcome require?

  • The FCA expects firms to focus much more on consumer outcomes and understanding throughout the customer journey. As such, the wording of this outcome has changed from “consumer communications” to “consumer understanding”, making it implicit that firms are required to adopt an enhanced standard of communication.
  • As well as ensuring that individual communications are fair, clear, and not misleading, firms will need to consider their overall approach to communicating information to make sure they equip customers to make: effective, timely, and properly informed decisions.
  • To achieve this result, firms will need to ensure that communications are tailored appropriately as well as monitored, tested, and adapted on an ongoing basis to ensure suitability. Where this is done by a third party, firms should ensure that this responsibility is clearly outlined and there are processes in place to assure them that this is done in line with the standards outlined in the Duty.

What challenges are firms facing?

  1. Intermediated customer journeys: not all UK wholesale distribution is direct from the product manufacturer to the retail investor and, to be frank, not a lot of business is generally conducted in this manner. Most manufacturers will have a large, intermediated distribution network consisting of platforms, wealth managers, advisory firms, and other investment managers. The key is understanding your distribution chain(s). To be able to plot out a customer journey, you first need to fully understand all the different routes, and entities within your chain, in which your product can end up with a retail consumer. Once you have identified those routes, you need to ensure your communications are tailored and appropriate.
  2. Effective communication: once you understand your different consumer journeys, communications must be tailored, tested, and adapted on an ongoing basis. Every product manufacturer has a different client base, definition of their base retail investor, style, tone, and risk appetite, meaning there is no industry standard. Manufacturers must consider each of these aspects when designing communications for each channel, and ensure clear documentation of the rationale for what forms these considerations.
  3. Feedback: when considering communication through the various channels, focus must be on ensuring that you regularly test your communications and embed the feedback into ongoing communication. This can be completed in-house, via consumer surveys and testing, or through third parties who will seek feedback for you. Ongoing feedback is key, and the accountable governance structures require reporting to confirm that this is not just taking place, but communications are appropriate for the intended consumer.

Last month with the FCA Consumer Duty Manufacturer implementation deadline, FinDatEx launched the European MiFID Template (EMT) V4.1 on 11th April 2023. Within this are ten new fields regarding the upcoming Consumer Duty requirements for U.K. firms, which enable the information exchange relating to Assessment of Value (AoV) and the Price and Value (P&V) outcome of the Consumer Duty. This version, along with the EMT V4, should be run in parallel with one another with the version being used being dependent on whether the product is distributed within the EU, within the U.K., or within both. If EU only, the EMT V4 should be used and if U.K. only, the EMT V4.1 should be used. When products are distributed in both the EU and U.K., both the EMT V4 and EMT V4.1 should be used.

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Embedding Sustainable Investment

Sustainable investment continues to dominate international, governmental, and corporate agendas, with a focus on channeling investment into green initiatives, and ensuring effective regulation is in place to prevent greenwashing. We have seen various developments throughout the first quarter within the investment management industry. In January, we saw the new Regulatory Technical Standards (RTS) for Sustainable Finance Disclosure Regulation (SFDR) becoming effective, ESMA12 publishing its opinion of the first set of European Sustainability Reporting Standards, and the latest version of the European ESG Template (EET) v1.1.1. From this point, we have seen progress with the European Green Bonds (EuGB), a request for ESMA to have a ‘re-think’ about its naming convention consultation, and SFDR now requiring updated templates. Most regulatory updates have originated from the EU, with the UK FCA pondering responses to the UK Sustainable Disclosure Requirements (SDR) consultation, which closed in January.

  • Starting with SFDR RTS Level 2, the industry faced significant challenges with the time constraints and extensive data requirements across all disclosures and PAI reporting, further complicated by having to meet these deadlines simultaneously. Whilst the SFDR Level 2 is effective, firms are still struggling to source ESG data metrics to supplement disclosure requirements, and demand from the wholesale sector is low. As the drive for sustainable products increases across wholesale markets, we expect further scrutiny of firms’ metrics and disclosures to begin within the EU.
  • The first draft of European Sustainability Reporting Standards (ESRS) by the European Financial Reporting Advisory Group was reviewed by ESMA. ESRS are designed to be a set of standards outlining the requirements for detailed corporate reporting on an extensive range of ESG issues. As of now, ESMA felt satisfied with these standards meeting their objectives of improving investor protection, accountability of firms, consistency and quality of information and not undermining financial stability. The 30th of June is the proposed date for these standards to be adopted, as a delegated act, with investment firms having to report extra metrics once implemented.
  • The next key development in the SFDR was the release of the EET v1.1.1, which was released on the 18th of January. There are no significant changes to the EET, however there has been the introduction of supplementary data fields for investments in fossil gas and nuclear, and one new data field for complementary PAI13 information. With its release, the EET v1.1.1 replaces the EET v1.1 as the only version to be used after the transition period ended on the 30th of April.
  • Regarding PAI information for SFDR, financial market participants (FMPs) are now to report on their previous reference period performance through the PAI statement as of 30th April 2023..
  • Another quick reminder that Taskforce on Climate-related Financial Disclosures (TCFD) reporting for specific FCA-regulated firms (asset managers; asset owners who are insurers or pure reinsurers; other asset owners other than insurers or pure reinsurers) is to be expected soon. This reporting is to either be presented as a standalone that is cross-referred to in the annual financial report or published within the annual financial report for its financial year that started on or after 1st January 2022.
  • European Green Bonds were initially proposed by the European Commission in July 2021 with the aim of regulating use of the “European Green Bond Designation” for bond issuers and investors. The designation would be limited only to bonds that are aligned with the EU Taxonomy, with the aim to reduce and prevent greenwashing in the bond market. There has been a provisional agreement from the EC14 and, once confirmed, the regulation will come into effect 12 months later.
  • The Securities and Markets Stakeholder Group (SMSG) reviewed and published advice to ESMA on its sustainable fund naming convention, which aims to ensure fund names accurately reflect their investment objectives, policy and strategy of the fund. In our last previous regulatory update, we highlighted the key proposals, below:

◦ For a fund to have ESG-related terminology in the name, a minimum proportion of 80% of investments should be used to meet Environmental or Social characteristics, or sustainable investment objectives.
◦ If a fund has the word “sustainable” in its’ name, or any terms derived from this, it too will require this 80% minimum threshold, with 50% of this coming from the SFDR definition of ‘sustainable investments’.

      The SMSG is a key advisor to ESMA and its review criticized various areas of the consultation proposals. Firstly, how it links to the existing European Supervisory Authorities’ greenwashing consultation. While the nature of both consultations are similar, the timelines and scope differ greatly creating a lack of harmony between them – this is flagged as a key issue. Importantly, the SMSG also felt like the quantitative thresholds were not yet ready to be implemented, as concept definitions and underlying data are not finalized, potentially confusing consumers even more.

      • Finally, we have also seen further development in the SFDR space, with the European Commission updating the SFDR RTS with disclosures for gas and nuclear activities, requiring firms with Article 8 or Article 9 funds to now use updated pre-contractual and periodic reporting annexes for such activities. For investors, this now gives them the ability to see and understand which Article 8 or 9 funds will allow them to invest in gas and nuclear energy.
      • From the UK perspective, the FCA published a Discussion Paper (DP23/1: Finance for positive sustainable change: governance, incentives and competence in regulated firms) as part of its ESG strategy on 10th of February. The discussion paper looks to explore sustainability-related governance, incentives, and competence in regulated firms. The aim is to understand the good practices which are being applied and whether there are further regulations required to help build a more sustainable financial sector and move to net zero. The FCA is welcoming responses until the 10th of May.
      • Furthermore, following the FCA’s updates on its Consultation Paper (CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels) on 29th of March, the proposed effective dates are to be expected to be adjusted due to the significant response from Financial Market Participants (FMPs). While this has been stated by the FCA, the exact changes to these dates are yet to be confirmed.
      • The end of March also saw the opening of HM Treasury’s Consultation Paper (Future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers) into ESG ratings providers as part of the Future Regulatory Regime. This focus on ESG ratings follows emphasis from both the International Organization of Securities Commissions (IOSCO) and the Organization for Economic Co-operation and Development (OECD) for regulators to be more attentive to ESG data and ratings and improving their quality. This Consultation is open from the 30th of March until the 30th of June and will help to form next steps for the U.K. Government on ESG ratings.
      • The U.K. Government also published its updated 2023 Green Finance Strategy (Mobilizing Green Investment), outlining the Government’s ambitions of elevating the U.K.’s global position as a world leader in green finance and investment through the following five objectives: improving the growth and competitiveness of U.K. financial services; greater investment in the green economy; enhancing financial stability; incorporation of nature and adaption; and alignment of global financial flows with climate and nature objectives. Within this is the announcement of the U.K. Green Taxonomy Consultation, which is to be expected in autumn of this year, a future consultation on net zero transition plan disclosures, the adoption of the ISSB global reporting standards into the SDR regime, and various other sustainable finance regulatory developments.

      Available! Broadridge ESG and PRIIPs KID Solutions

      Broadridge Fund Communication Solutions has extensive expertise in managing fund data and understands the challenges involved. We offer ESG and PRIIPs KID solutions, providing complete support for all aspects in the composition, maintenance, and document distribution of both documents in all jurisdictions. Benefit from increased operational and cost efficiencies across your business with Broadridge Fund Communication Solutions as your single digital platform, supporting all your data, documents, and regulatory reporting needs across the life cycle of funds.

      Click here for more information


      (1) Packaged Retail Investment and Insurance Products (PRIIPs) Key Information Document (KID)
      (2) His Majesty’s Treasury (HM)
      (3) Financial Conduct Authority (FCA)
      (4) Undertakings for the Collective Investment in Transferable Securities (UCITS)
      (5) Key Investor Information Documents
      (6) Packaged Retail Investment and Insurance Products (PRIIPs) Key Information Document (KID)
      (7) Alternative Investment Fund Managers Directive
      (8) Markets in Financial Instruments Directive
      (9) Non-UCITS Retail Schemes
      (10) Authorized Fund Management firms
      (11) Depository Participant
      (12) European Securities and Markets Authority
      (13) Principal Adverse Impacts
      (14) European Commission

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