Investment management update - March 2023

06 April 2023

Welcome to the latest edition of our investment management update. This publication has been tailored to highlight topical news, cases and changes in the law impacting the investment management sector.

On 30 March, the PRA and FCA jointly published a Discussion Paper on the review of the Senior Managers & Certification Regime (SMCR). The initiative was initially announced on 9 December as part of the Government’s Edinburgh Reforms. DP1/23 is wide-ranging, seeking evidence and views on all aspects of the SMCR. The regulators have not yet defined their proposals for reform, which might follow via a subsequent consultation paper. However, the paper does point to the greater breadth of the UK’s regime compared with individual accountability regimes in other jurisdictions. The comparison hints at the potential for a narrowing of the UK’s regime with an aim to improve the country’s global competitiveness. Comments are requested by 1 June.
The Government designated 30 March as “Green Day” and published a raft of ESG-related announcements. The published documents included its long-awaited revised Green Finance Strategy, a consultation on regulating ESG ratings providers, a Net Zero Growth Plan, and an Energy Security Plan. The first of these two documents contain proposals that are directly relevant to asset managers and financial services. The announcements include a proposal to bring ESG ratings providers into the FCA’s regulatory perimeter (but not ESG data more generally and not managers’ internal proprietary ESG scoring); and states its intention to consult on requiring companies to disclose their net zero transition plans, on scope 3 emissions reporting, on climate adapation metrics and guidance, on a regulatory framework for investment stewardship, and on clarifying the fiduciary duty. The Government also confirm that it will consult on the UK’s Green Taxonomy in Autumn 2023, that it proposes to include nuclear power (initially announced at the Spring Budget on 15 March), and that it will be voluntary for the first two years after the rules are completed but it will become mandatory for larger companies thereafter. The Government will also consider in summer 2023 how to adopt the global ISSB standards into the UK’s disclosure regime. Finally, all three strategy documents contain information and proposals that are relevant to a range of asset classes and sectors, including real estate, infrastructure, and technology.
On 29 March, the FCA published an update stating that its Sustainability Disclosure Requirements (SDRs) final rules will not be published by 30 June 2023 (when the first component, the anti-greenwashing rule, was due to take effect) but its Policy Statement will be delayed until the third quarter. The FCA said that it will need more time to respond to the feedback that it received on its draft proposals, and the effective dates for the SDRs components will be adjusted accordingly. Specifically, the FCA will address concerns about fund labels, the qualifying criteria for ESG funds and the requirement for independent verification, and its marketing rules. The FCA will seek international alignment and will continue to engage with the industry as it works on its clarifications to the rules. The delay follows the Treasury Sub-Committee on Financial Services writing on 9 March to the CEO of the FCA, Nikhil Rathi, about the SDRs. The letter asks the FCA to respond by 23 March on several matters, including requesting a cost-benefit analysis on the SDR’s impacts on consumers and the impacts of the costs of divergence on firms, the FCA’s intended actions to enforce against greenwashing, and an assessment of the risks if the UK standards are too onerous for EU and US funds to comply with or choose to meet.
On 29 March, the Bank of England’s Financial Policy Committee (FPC) published its recommendations for the reform of Defined Benefit pension schemes’ Liability Driven Investment (LDI) strategies. The proposals are the FPC’s response to the autumn 2022 crisis in the gilts market and follows a series of actions that the FPC committed to in December. The FPC’s latest summary and record note recommends that stress testing should take account of historical volatility in gilts; liquid assets should be unencumbered and immediately available; minimum resilience should be maintained in normal times, with an excess to take account of risks, but may be drawn down in times of stress; and funds should take account of the nature of their exposures when modelling their resilience to stress. The FPC recommends that The Pensions Regulator (TPR) undertakes specific actions to address these recommendations, and TPR has subsequently confirmed that it will issue guidance in April.
On 29 March, the FCA’s CEO Nikhil Rathi gave a speech updating on the FCA’s work on the UK’s listings regime, which has come under recent public criticism due to the high-profile cases of companies deciding to list primarily in other jurisdictions. Rathi outlined the proposals that the FCA intends to propose, which reflect its response to the feedback received in relation to DP22/2. An FCA consultation including its proposals and draft rules is expected soon.
On 29 March, the Government’s new Department for Science, Innovation, and Technology published a white paper on the regulation of Artificial Intelligence (AI). The Government proposes a principles-based regulatory regime that aims to balance objectives such as safety and fairness, with a pro-innovation outlook. The white paper follows the publication of the Government’s Chief Scientific Adviser, Sir Patrick Vallance’s review into pro-innovation regulation of digital technology. The white paper is open for consultation until 21 June. The Government has also confirmed that it will develop an AI sandbox to promote the development of new technologies.
On 24 March, HM Treasury and the FCA jointly published a statement confirming that it has completed its review of the criminal market abuse regime. The review identified several areas in which the regime could be updated. The changes will be delivered as part of the Future Regulatory Framework process in which on-shored EU legislation will be scrapped (via the soon-to-be-completed Financial Services and Markets Bill). The Government will revoke specific regulations via secondary legislation and the FCA will make the relevant changes to its Handbooks (whether removing, amending, or copying regulations). The criminal market abuse regime changes will happen alongside changes recommended in the Fair and Effective Markets Review for the market abuse regime.
On 21 March, the FCA published the results of a preliminary review of ESG benchmark administrators, finding that the quality of their disclosures is “poor”. A letter was sent to firms detailing the issues identified: insufficient detail on ESG factors considered in benchmark methodologies, not ensuring that details about the methodologies are accessible, clearly presented, and explained to users, and failures to implement methodologies accurately (for example, using outdated data and scores). The FCA expects firms to address the issues and states that it will do more to address potential failings, including via the use of supervisory tools. The FCA has launched an expert group to work on a code of conduct for ESG data providers. As noted above, HM Treasury is consulting on bringing ESG ratings providers into FCA regulation and supervision.
On 21 March, the FCA’s Director of Consumer Investments, Therese Chambers, gave a speech in which she confirmed that the FCA will undertake further work on a simplified, core investment advice regime, and that the Government and the FCA will undertake a holistic review on the boundary between advice and guidance. This work is broader than that proposed in the FCA’s recent consultation on a simplified advice regime for ISAs.
On 21 March, the FCA published an update on its authorisation operating service metrics. The update states that authorisation case loads have fallen since December, that the time periods to allocate a case officer for change in control notifications has reduced, and that poor quality and incomplete applications remain a problem in relation to money laundering, payments, and e-money regulatory approvals.
On 2 March, the FCA launched a review of wholesale market data. The market study will consider competition between benchmark providers, credit ratings, and market data vendor services. The FCA asked for views on its terms of reference by the end of March. It will decide on whether to make a reference to the Competition and Markets Authority on specific markets or issues by 1 September 2023. The FCA will publish its Market Study report by 1 March 2024. In addition, the FCA published the results of its 2022 trade data review into issues around pricing, competition, and accessibility. The FCA generally found no issues in firms’ accessing trade data, but did identify problems relating to competition, choice, and available options. The FCA will work with the Government on the creation of a consolidated tape and will continue its broader work via the wholesale data market study.

On 29 March, EFRAG stated that its publication of the sector-specific European Sustainability Reporting Standards (ESRS) will be delayed. EFRAG has not confirmed its new timetable, but a recent board meeting suggested that the delay of the sectoral standards could be one year. The ESRS form the content of the EU’s Corporate Sustainability Reporting Directive, which is due to take effect from 2024.
On 28 March, ESMA issued a public statement on the marketing and sale of fractional shares. The statement clarifies firms’ investor protection and product governance obligations under MiFID II in respect of a new and developing investment product. ESMA also bans the use of the term “fractional shares” because it is deemed to be misleading (the product being in fact a derivative on the fraction of a share). The product may not be sold on an execution only basis to retail investors due to its complex nature, although it is permissible to recommend the product via investment advice subject to a suitability assessment. PRIIPs disclosure requirements also apply.
On 25 March, the CSSF began its data collection exercise on compliance with the SFDR. The process was announced via a communication on 27 July. The exercise collects information about SFDR pre-contractual disclosures in a digital format, encompassing Articles 6, 8, and 9. UCITS management companies, Luxembourg Authorised AIFMs, non-Luxembourg authorised or registered AIFMs in respect of their Luxembourg regulated AIFs, and any Luxembourg products not under the CSSF’s direct supervision, are in scope.
On 24 March, the Central Bank of Ireland (CBI) published a letter on UCITS costs and charges. The letter summarises the CBI’s findings from the 2021 pan-EU Common Supervisory Action on the topic and its supervisory expectations. The letter addresses policies and procedures, periodic review, design and oversight of fee structures, efficient portfolio management, fixed operating expense models, and non-discretionary management charges. The CBI expects firms to undertake a gap analysis against the findings and to have a developed plan of action by Q3 2023.
On 21 March, ESMA’s chair Verena Ross gave a speech on the macro-prudential regulation of open-ended funds. The speech highlighted the risks of liquidity mismatches, including in recent events such as the stress on LDI funds. Ross pointed to global (FSB and IOSCO) work that is ongoing on the use of liquidity risk management tools and the use of stress testing and data analysis; the AIFMD Review that recently concluded and that requires ESMA to undertake Level 2 work including in relation to liquidity, loan origination funds, and a new reporting regime for UCITS; and ESMA’s recent proposals to improve the resilience of money market funds.
On 20 March, the revised ELTIF Regulation was published in the EU’s Official Journal. The legislation will enter into force on 9 April, but implementation applies from 10 January 2024 when ELTIFs must be authorised under the new rules. Existing ELTIFs, authorised up until the new regime takes effect, will be deemed compliant until 11 January 2029.
On 13 March, the ECB and the ESAs issued a joint statement calling for climate-related disclosure requirements for structured products. The statement says that a lack of climate data poses problems for compliance with, and the classification of products under, the SFDR and the Taxonomy. The authorities argue that data on the underlying assets would enhance transparency for the assessment of climate-related risks. The statement also says that ESMA is working with national authorities on climate-related disclosures for securitised assets.
ESMA published a letter dated 10 March addressed to the EU’s co-legislators stating its concerns about the European Commission’s proposed changes to the Market Abuse Regulation. ESMA’s specific concerns relate to the ability to identify non-permanent parties to inside information and removing the requirement to notify insiders when they are in possession of inside information. ESMA’s concern is that changes to issuers’ inside lists will result in increased insider dealing and requests for these issues to be addressed in the legislative process.
On 8 March, the European Commission wrote to the ESAs to request that they undertake a one-off climate scenario analysis of the EU’s financial system, in cooperation with the ECB and the ESRB. The Commission asks that the exercise “goes beyond the usual climate stress tests” to provide a cross-sectoral analysis and determine the extent to which the system can support sustainable investment while under stress. The Commission has asked for “policy-relevant conclusions” before Q1 2025.

On 28 March, the Taskforce on Nature-related Financial Disclosures (TNFD) published a fourth and final draft of its disclosure framework. The final TNFD framework is due to be published in September and aims to provide a global harmonised baseline for biodiversity-related reporting, modelled on the TCFD approach to climate-related reporting. There are indications that the UK and other jurisdictions might mandate TNFD reporting by financial institutions.
The IFRS has confirmed a new project to improve the reporting of climate-related risks in financial statements. The International Accounting Standards Board (IASB) produces the IFRS Accounting Standards used for financial accounting and will broaden its scope to consider climate-related risks. The International Sustainability Standards Board (ISSB), which also operates under IFRS, is working in parallel to conclude its non-financial reporting standards, providing a new global baseline for corporate sustainability reporting. One issue that the IASB will consider is whether scenario planning under the ISSB standard could inform the reporting of assets and liabilities under the IFRS Accounting Standards. The IASB will develop a work plan and consult stakeholders in due course.