Broadridge is delighted to provide you with our latest regulatory update for the U.K. and European markets. These are the most impactful changes within the regulations of the investment industry, condensed into a selection of brief updates.

Consumer Duty and Distributor Feedback

The Financial Conduct Authority’s (FCA) Consumer Duty aims to create a culture within the industry that protects consumers and prioritises their needs. Under the section “Principles for Businesses (PRIN) 2A.3 retail customer outcome - products and services” fund manufacturers are required to regularly review their products. This has created an obligation for distributors to provide information to manufacturers for their product review processes.

There is a significant challenge to both manufacturers and distributors who must gather and disseminate all the required data. We have seen varying approaches to how qualitative feedback will be managed.

Although the FCA has said that they want to see a flow of information between distributors and manufacturers, they have left the definition of this data to a joint trade association working group, including Investment Association Investment Association (IA), The Investing and Saving Alliance (TISA), Personal Investment Management & Financial Advice Association (PIMFA) and others who have created the Distributor Feedback Template (DFT).

The FCA has suggested the end of March 2024 as an appropriate cut-off date for the first set of feedback data consisting of eight months’ worth of data; subsequent cycles will be six months in length. In November 2023, approximately 40% of distributors claimed they would be ready for an end of March implementation date. Since that time, larger distributors who were initially opposed to conforming to the industry standard began to acquiesce. Although we do not know exactly how many distributors have complied to date, we believe that it is unlikely that everyone was ready for this initial deadline and that uptake will grow over the rest of the year.

EU Retail Investment Strategy 

This omnibus directive is aimed at improving access to financial markets for the retail investor, as well as ensuring investor protection. Most significant is the proposed move towards a digital version of the Key Information Document (KID), although not a total break from using PDF versions.

The EU commission published the RIS in May 2023, proposing changes to regulations including Markets in Financial Instruments Directive (MiFID), Undertakings for the Collective Investment in Transferable Securities (UCITS), Packaged Retail Investment and Insurance Products (PRIIPs), Alternative Investment Fund Managers Regulations (AIFMD), Solvency II, among others. The strategy indicates a desire to see the EU parliament and council come together and finalise their approach in a document that the market could consequentially build upon. On March 21, 2024, Members of the European Parliament (MEPs) in the European Parliament's economic and monetary affairs committee approved the RIS proposals. This paved the way for a parliamentary vote by June 2024, meaning that the earliest possible implementation date will be late 2025, subject to the prior adoption of new Regulatory Technical Standards (RTS).

Despite the MEP vote, the finalised text may be delayed until the end of 2024, with a possible implementation date of April 2026. It seems unlikely that we will see any impact until the end of 2026, or even the start of 2027. In addition to this, delays may be compounded as the end of 2026 is looking crowded in terms of regulatory change with the UCITS KIID exemption period expiring in the UK, and the end of the UK PRIIPs KIDs.

Annual Update of UCITS KIIDs and PRIIPs KIDs

Turning our attention to retail investor disclosure in the UK and Europe, here is an update on some changes that are expected and some that have been clarified.

The Commission de Surveillance du Secteur Financier (CSSF - Luxembourg) and the Central Bank of Ireland (CBI - Ireland) released some new filing guidance that caused a little confusion in the market. This arose from a misunderstanding that the CSSF had mandated that the KID filing period should follow the same 35-business-day deadline from the start of a new year that KIIDs currently follow. However, this has now been clarified as a request rather than a requirement.

Use of UCITS KIIDs in the U.K. market has been extended until 2026. This will be the same for the U.K. version of the PRIIPs KIDs based on the following from HM Treasury:

“4.3 The government will replace the PRIIPs Regulation with an overarching legislative framework, with firm-facing retail disclosure requirements being replaced with rules set by the FCA.

4.4 The new UK retail disclosure framework for CCIs will be proportionate and tailored to UK markets, balancing support for UK businesses by ensuring retail investors receive appropriate disclosure to make informed investment decisions.”¹

At the end of 2022, when much of the European funds industry was involved in the UCITS KIID to PRIIPs KID transition, there was some confusion as to which entity should be named on the PRIIPs KID as the PRIIP manufacturer. European Securities and Markets Authority (ESMA) clarified the requirement in their PRIIPs Q&A in December 2023, stating that the manufacturer named on the KID document:

“..can only be the management company or the alternative investment fund manager of the fund, or, in particular in the case of a self-managed UCITS or internally managed AIF, the fund itself.”²

Sustainability Disclosure Requirement 

Despite some delays we are now seeing the initial impact of the U.K.’s Sustainability Disclosure Requirement (SDR) appearing in the near distance. There was an expectation for the FCA to publish this in the first quarter, if not the first half of 2023, but this was pushed back to November of that year. We will see the first of these regulations coming into effect at the end of May 2024, beginning “Anti-Greenwashing Rules” that will affect any firms registered with the FCA. These rules will mean that any marketing materials that reference sustainability need to ensure that these descriptions are clear and substantiated. The next significant step will happen at the end of July, when the U.K.’s labelling regime will come into effect —focusing on the following labels:

• Sustainability Focus
• Sustainability Improvers
• Sustainability Impact
• Mixed Goals

These unfortunately do not correspond to the SFDR’s articles 6, 8, and 9, meaning there is no direct comparison between them, especially when it comes to “Sustainability Improvers,” which has no alternative under SFDR. Europe is much more focused on current outputs that may damage the environment, but U.K. labels are more concerned with how industries can improve in the future. This could create several challenges: for example, a fund group selling a fund from one region into another may find that it is considered sustainable by one regulating body, but not the other.

Firms will be required to create three new fund disclosure documents relating to these labels. Although there is an early “opt-in” opportunity from the end of July, we do not foresee many firms doing so until the hard deadline in December. Going into 2025, firms will be expected to create an annual report on an entity level, which will be much more akin to the existing Principal Adverse Impact (PAI) report under SFDR.

Sustainable Finance Disclosure Regulation

The Sustainable Finance Disclosure Regulation (SFDR) has been in force for just over a year now, but at the end of 2023, the European Supervisory Authorities proposed some targeted changes to PAI indicators. The European Commission now has up to two months to decide whether it will endorse the proposals in the PAI review and modify the SFDR Delegated Regulation accordingly. Once these changes have been ratified, they will then need to be approved by the European Parliament and member states, which will take another two to four months. Approved changes will then come into force on the 20th day following the publication, but the actual effects of this are not expected to be felt until after 1 January 2025.

One proposed change will be to the existing SFDR templates. This is creating a general sentiment of fatigue among asset managers, and while SFDR disclosure production was kept in-house initially, there has been a shift to outsource this due to the burdensome and ever-changing requirements.

Additional Updates

The FCA has published a consultation paper, “CP23/26”, on implementing the Overseas Funds Regime (OFR). The OFR sets out a process for non-U.K. domiciled funds to market to U.K. retail customers where the U.K. Government has found a jurisdictional equivalent. The U.K.’s Investment Association has responded somewhat negatively to this, however, as they perceive the OFR providing EU funds with a slight advantage with regards to the comparative regulatory burdens that they face (for example they would not have to conform to Consumer Duty).

Simplify financial and regulatory reporting with Broadridge Fund Communication Solutions

We hope that these updates have been of some use to you, we aim to simplify the challenges of the investment industry by delivering client-centric services and products that address the ever-changing requirements of financial regulation.

References

<sub>1. European Securities and Markets Authority (ESMA)
2. https://www.esma.europa.eu/sites/default/files/2023-05/JC_2023_22_-_Consolidated_JC_PRIIPs_Q_As.pdf</sub>