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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.
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:
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.
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:
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:
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:
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:
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.
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?
What challenges are firms facing?
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.
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.
◦ 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.
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.
(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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