October 2021
Regulatory Round-up - Q3 2021

In this edition we cover:

United Kingdom

  • Investment Firm Prudential Regime
  • FCA Business Plan 2021/22
  • FCA Annual Report 2020/21
  • Diversity and inclusion in financial services
  • FCA expectations on ESG matters
  • RTS under the SFDR delayed for six months
  • Cross-border distribution of collective investment undertakings
  • FCA consults on post-Brexit divergence for PRIIPs regulation
  • FCA review of fund manager asset value
  • FCA makes changes to the Appointed Representative notification process
  • Consultation on new powers to remove unused firm permissions
  • FCA reminder to firms to review cyber security arrangements

Investment Firm Prudential Regime

On 6 August, the FCA released CP21/26, its third and final Consultation Paper proposing rules for the new prudential regime for MiFID Firms, the Investment Firm Prudential Regime (“IFPR”). The IFPR will come into force on 1 January 2022.


CP21/26 primarily focuses on the disclosure requirements MiFID firms will be subject to under the IFPR, ultimately replacing the existing Pillar 3 disclosure requirement.  


The scope of information required to be disclosed by firms will vary depending on a firm’s categorisation under the IFPR; with the smaller, less risky firms, to be known as “small and non-interconnected investment firms” (or “SNIs”), subject to fewer disclosure requirements. 


Disclosures will need to be made by firms on an annual basis, in an easily found and accessible part of their website or, if the firm does not have a website, via other freely available media (for example material published for, or provided to, investors, such as an annual report or investor brochure).


The consultation period for CP21/26 closed on 17 September 2021, with final rules expected to be published by the FCA in Q4 2021.


Portman remains available to assist clients with any questions they may have around the implementation of the IFPR.

FCA Business Plan 2021/22

The FCA has published its Business Plan for 2021/22.  The business plan explains how the FCA sees its future role and priorities, how it intends to deliver them and how it will measure its performance. The FCA has stated that it will be focussing on technological transformation by investing in new technology, and making better use of data.


The regulator set out its main priorities in three key areas which are consumer priorities, wholesale market priorities and all market priorities. 


Full details can be seen by downloading the Q3 2021 regulatory round-up. 

FCA Annual Report 2020/21

The FCA’s Annual Report sets out what the regulator has delivered and achieved in the past year against the objectives and priorities it set in its Business Plan 2020/21.


The FCA's key priorities are as follows: 

  • Consumer investments
  • Payment safety and accessibility
  • Consumer credit
  • Fair value


Full details can be seen by downloading the Q3 2021 regulatory round-up. 

Diversity & Inclusion in Financial Services

In July 2021 the Financial Conduct Authority, Prudential Regulation Authority and the Bank of England issued a joint consultation paper which invited stakeholders across the industry to provide comment on diversity and inclusion efforts in financial services with the hope and expectation of accelerating the pace of meaningful change going forward. 


The discussion paper recognises that improvements have been made over the past 10-years, however, cites various studies which demonstrate that progress has been slow. The FCA understands that diversity and inclusion is critical to its work on culture and governance, particularly when promoting good conduct, healthy working cultures and innovation. The Regulator hopes that the discussion paper will start a conversation with the wider industry and enable it to gain insight into the approaches taken by firms, whilst also setting out its expectation that all firms take diversity and inclusion seriously. 


The FCA is considering updating its approach when assessing firms and senior managers to ensure that diversity and inclusion is a consideration, at authorisation and on an ongoing basis thereafter. The consultation paper clarifies that the Regulator does not intend to define what diversity and inclusion will look like at individual firms, as it will not apply a one size fits all approach, however, it is clear that firms must strive to promote diversity and inclusion throughout their business and will likely receive questions from the FCA on the matter going forwards. 


The FCA and PRA are current considering the feedback received industry and intend to consult on more detailed proposals in Q1 2022. A further Policy Statement is expected to be released in Q3 2022.

FCA expectations on ESG matters

On 19 July 2021, the FCA issued a letter to the Chairs of Authorised Fund Managers (“AFMs”) highlighting the need for an improvement in quality and clarity where AFMs manage funds with an ESG and sustainability focus.


The letter explains that, through its assessment of new fund applications as well as amendments to the investment strategy of existing funds, the FCA has seen a large number of claims of an ESG and sustainability focus.  However, it found that many of the claims made did not bear scrutiny. Further, that applications were poorly drafted and fell below its expectations, while matters the FCA would have expected to have been considered at product design stage were not being addressed by AFMs.


Once funds are authorised, the FCA expects clear and accurate ongoing disclosures to be made to consumers where funds make ESG-related claims and it wants to see funds deliver on their stated objectives and/or strategy.


With ESG and sustainability being a fast growing trend, the FCA is aware that both it and fund managers have a role to play in building trust in the market. 


As a result, the FCA has issued a set of guiding principles detailing its expectations for AFMs that manage funds with an ESG and sustainability focus.  At a high-level, those guiding principles are:


  • Overarching Principle: Consistency - A fund’s ESG/sustainability focus should be reflected consistently in its design, delivery and disclosure. A fund’s focus on ESG/sustainability should be reflected consistently in its name, stated objectives, its documented investment policy and strategy, and its holdings.#


  • Principle 1: The design of responsible or sustainable investment funds and disclosure of key design elements in fund documentation - References to ESG (or related terms) in a fund’s name, financial promotions or fund documentation should fairly reflect the materiality of ESG/sustainability considerations to the objectives and/or investment policy and strategy of the fund.


  • Principle 2: The delivery of ESG investment funds and ongoing monitoring of holdings – The  resources (including skills, experience, technology, research, data and analytical tools) that a firm applies in pursuit of a fund’s stated ESG objectives should be appropriate. The way that a fund’s ESG investment strategy is implemented, and the profile of its holdings, should be consistent with its disclosed objectives on an ongoing basis.


The FCA advise that it will continue to challenge firms to ensure that funds meet its regulatory requirements. Therefore, AFMs should ensure that they consider the FCA’s guiding principles and that expectations are being met at the design, delivery and disclosure stages of their fund life-cycles.

RTS under the SFDR delayed for six months

On 8 July 2021, the European Commission issued a letter confirming that the date of application of the regulatory technical standards (“RTS”) under the Sustainable Finance Disclosure Regulation (“SFDR”) will be deferred by six months.  Rather than applying on 1 January 2022, the RTS will now apply from 1 July 2022.


The European Commission confirm that the delay has been implemented due to the length and technical detail of the RTS and to ensure a smooth implementation of the standards expected of product manufacturers, financial advisers and supervisors.

Cross-Border Distribution of Collective Investment Undertakings

On 2 August 2021, the Cross-Border Distribution of Collective Investment Undertakings Directive (the “Cross-Border Directive”) came into effect in the EU.


While the new Directive applies directly to EU AIFMs and UCITS Mancos and their EU AIFs and UCITS funds, it may also have an impact on UK firms; for example a UK MiFID firm which has been sub-delegated investment management responsibilities for an EU domiciled UCITS fund. 


Highlights of the changes brought about by the Cross-Border Directive include:


  • AIFMD Pre-marketing: The AIFMD has been updated to include a formal definition for ‘pre-marketing’. Specifically, where a firm provides information on investment strategies to a potential investor in order to test their interest in an AIF, it will be deemed to pre-marketing in the EU.  Where this occurs, a notification must be provided to the relevant EU competent authorities within two weeks of the pre-marketing commencing.  Further, any pre-marketed AIF must be registered for formal marketing if an investor subscribes within 18 months of pre-marketing activities taking place.

    While the above requirement applies to EU AIFMs and their AIFs, we have already seen Germany confirm that it will also require ‘third-country’ AIFMs to comply with pre-marketing registration regime.   It is expected that other EU jurisdictions will follow suit.


  • Marketing de-registration:  Where an EU AIFM or UCITS Manco wishes to cease marketing its vehicle in an EU jurisdiction, it must now send a notice of de-registration to its home state regulator, and make its intention to stop marketing publicly available.  The AIFM/Manco must also make a blanket, publicly-available offer to repurchase or redeem (free of charge or deductions) all units or shares of the AIF or UCITS being de-notified, which are held by investors in the jurisdiction(s) in which marketing has ceased.  Finally, an AIFM which has submitted a de-registration notice is unable to engage in pre-marketing of that AIF, or in respect of similar investment strategies or investment ideas, in the jurisdiction(s) in which it is being de-registered for a period of 36 months.


  • High level marketing requirements: The Cross-Border Directive introduces new high-level marketing requirements which will, amongst other things, make compulsory the inclusion of a statement around firms’ ability to cease marketing under the marketing de-registration process mentioned above.  Further, it will allow EU state regulators to require UCITS Mancos to submit marketing notifications to the regulator for prior review.  It is noted that more prescriptive marketing guidelines will be provided by ESMA in Q1 2022.


As indicated above, while the new requirements primarily affect EU firms and their funds, UK firms should consider whether they are indirectly impacted by the new requirements.

FCA consults on post-Brexit divergence for PRIIPS regulation

In July 2021 the FCA published a consultation paper proposing targeted changes to the UK’s PRIIPs Regulation which are possible due to the Treasury’s onshoring of the legislation as a result of Brexit. 


The consultation sets out proposals to address the most pressing concerns regarding the effectiveness of the PRIIPs regulation, which were identified as a result of the FCA’s “Call for Input” and ongoing supervision activities. 


The FCA believes the current format of the PRIIPs Key Information Document may result in consumers being provided with inaccurate or misleading information and aims to address these issues via the proposed changes. 

FCA review of Fund Manager assessment of value

The FCA has now released the findings of their review into how authorised fund managers (AFMs) carry out assessments of value (AoV) for the funds they operate.  The FCA’s key findings were:


How the AoV Rules were applied: Most AFMs the FCA reviewed had not implemented AoV arrangements necessary to comply with the FCA Collective Investment Scheme Sourcebook (COLL) rules;


Assessment of fund service quality and performance: AFMs are required to consider the range and quality of the services provided to investors when assessing whether their fees are justified.  A few firms placed emphasis on intangible matters such as ‘trust the brand’ rather than more quantifiable measures. When considering the fund’s performance, many firms did not consider what the fund should deliver given its investment policy, strategy and fees.  For example, some firms assessed the gross performance of their funds, rather than net performance, as required by the Rules.  Some AFMs assessed themselves as having hit their performance targets where markets rose anyway, despite the funds underperforming their comparator benchmarks;


Assessment of AFM costs and economies of scale: Many firms incorrectly implemented the requirement to assess their charges, comparing their fees to those charged by competitors’ funds rather than in the context of the costs incurred in operating their own fund.  The FCA noted that some firms were able to cut costs for outsourced service providers, through economies of scale but failed to pass those savings onto investors.  The FCA expects firms to focus on these costs, and whether they are justified, so that savings can be shared with investors as funds grow;


Assessment of comparable market rates and services: The FCA found instances where the potential for fee cuts for investors were overlooked because funds had not given separate consideration to each unit class.


Assessment of classes of units: Firms are required to justify fees at unit class level, considering whether investors in one class should pay more than those in other unit classes with substantially similar rates.  The FCA found that firms were not always applying this assessment correctly leading to some firms overlooking potential savings for investors in higher charging classes of units;


Quality of reporting: AFMs are required to issue an annual report setting out a description of asset value and whether the fund fees are justified in the context of the overall value delivered.  The FCA found that a number of firms were exhibiting good practice in their reporting and recommended that firms review their peers’ reporting and ensure that their reports meet the relevant requirements of COLL; and


Independent directors’ contribution: Some of the independent directors on AFM Boards did not provide the robust challenge the FCA expected from them and appeared to lack a sufficient understanding of the relevant funds.


The FCA expects all AFM Boards to consider the findings of this review, how they apply to future AoV assessments and implement appropriate changes where necessary to prevent shortcomings.  Further details on the review are available on the FCA website.

FCA makes changes to the Appointed Representative Notification process

The FCA has confirmed that, effective 16 September 2021, it has changed its Appointed Representative (“AR”) notification process.


Previously, Principal Firms could only submit AR notifications on a stand-alone basis, with corresponding Approved Person applications only being able to be submitted once the FCA had processed the AR notification.  


However, going forward Principal Firms will be required to combine their AR notifications with an accompanying Form A for those individuals who will act on behalf of the AR.


The FCA notes that the amended process will allow it to integrate both assessments simultaneously, those being the suitability of the AR and the fitness and propriety / overall regulatory conduct of the individual.

Consultation on new powers to remove unused firm permissions

On 9 September, the FCA issued CP21/28, a consultation proposing changes to its Handbook and Enforcement Guide.


The changes reflect the new powers granted to the FCA, under the Financial Services Act 2021, to ‘more quickly and efficiently’ vary or cancel a firm’s Part 4A Permission where it deems that the permissions held by a firm are not being used.  


This follows the FCA’s ‘use it or lose it’ approach that first arose January 2021, where the Regulator reminded firms of their obligation to review their regulatory permissions and ensure they are up to date or removed if not needed.  


The consultation closes on 29 October 2021 and comments are welcomed by the FCA prior to this date.

FCA reminder to firms to review cyber security arrangements

The FCA provided a reminder to firms of the importance of reviewing their cyber resilience.  


Specifically, the Regulator pointed firms to the documents it has issued over recent years providing examples of good practice relating to cyber security arrangements, with areas covered including: identity and access management; the importance of robust governance; and third party and supply chain risk.  


The FCA encouraged firms to familiarise themselves with its cyber security insights from 2020, 2019 and 2018 and implement changes to their current arrangements where necessary.