UK/EU Investment Management Update (December 2022)
FCA intervention on financial promotion
On 4 November 2022, the FCA published data that showed the UK regulator had reviewed 340 promotions and intervened to amend or withdraw 4,151 financial promotions from July through September, the highest since it started publishing the data at the start of 2021.
While the majority of the financial promotion interventions were in the retail lending, investments, and banking sectors, the FCA is showing increased willingness to use its powers to take action on misleading and unclear promotions.
The FCA reiterated that it expects authorised firms to take responsibility in making sure all communications of financial promotions are clear, fair, and not misleading and otherwise comply with its relevant rules. In addition, the FCA noted that this can also include oversight of appointed representatives, or introducer-appointed representatives, and marketing across all media platforms such as websites, paid-for Google ads, and social media sites.
FCA to circulate mandatory data requests to principal firms on their appointed representatives
The FCA has published new rules to make authorised financial firms (known as principals) more responsible for their appointed representatives (ARs), which were discussed in our August 2022 Update. As part of the FCA’s enhanced reporting requirements, the FCA has confirmed that principal firms will receive a mandatory Section 165 data request for information about their current ARs. The request will be sent by email to the Principal User of the principal firm on the FCA’s Connect platform from 8 to 10 December and will be accompanied by guidance on how to complete the request. Firms should ensure their details are up to date. The deadline for responding will be 28 February 2023.
2. UK — MiFID
FCA updates website following the extension of the Temporary Transitional Powers in relation to the share trading obligation and derivative trading obligation
On 24 November 2022, the FCA updated its website on onshoring and the Temporary Transitional Powers (TTPs) to confirm that the expiry date of the FCA’s TTPs in relation to the share trading obligation (STO) and the derivative trading obligation (DTO) has been extended to 31 December 2024. For details on this extension, please see our November 2022 Update.
In the Wholesale Markets Review (as discussed in our March 2022 Update and August 2022 Update), HM Treasury consulted on abolishing the STO and giving the FCA permanent powers to modify or suspend the DTO in certain circumstances. The new regime for the STO and the DTO will be implemented, subject to parliamentary approval, as part of the Financial Services and Markets Bill 2022–23 (also discussed in our August 2022 Update). The extension of the application of the TTPs in relation to STO and DTO until 31 December 2024 is aimed at bridging this timing gap and providing appropriate continuity to market participants.
3. UK — Bank of England
Bank of England’s executive director of financial stability strategy and risk outlines how leverage in the UK non-bank financial sector can threaten financial stability
On 7 November 2022, the Bank of England’s executive director on financial stability strategy and risk, Sarah Breeden, gave a speech to the International Swaps and Derivatives Association (ISDA) and Alternative Investment Management Association (AIMA) explaining how poorly managed leverage in “non-banks” (such as pension or hedge funds) can threaten financial stability and what can be done to mitigate such threat.
The speech highlighted the Bank of England’s concern with recent high-profile events among the non-bank financial sector, which have pointed to an urgent need to improve practices around leverage. It pointed to events, such as pension funds investing in liability-driven investment funds, the March 2020 “dash for cash,” and the failure of Archegos in 2021. In all three scenarios, Breeden noted that margin calls caught non-banks off guard, leading to the forced liquidation of assets and, ultimately, market-wide turmoil.
The speech stressed that the onus for building resilience in the non-bank system sits “first and foremost” with the firms themselves to manage the liquidity consequences of their risk exposures. In particular, non-banks were called to conduct stress testing in a manner that considers real market dynamics and industry standards from ISDA and AIMA.
In addition, Breeden added that regulation can also play a role as the Bank of England considers it is vital that authorities have sight of leverage building up in the system. Breeden noted that this would require better regulatory disclosures for non-banks and investment in monitoring capabilities. In addition, other regulatory measures could be considered for leverage management, such as policies on market pricing and margin.
See also item 8 below on the Financial Stability Board’s report on non-bank financial intermediation (NBFI).
4. UK — HM Treasury
UK government ceases plans to introduce intervention power over financial services regulators
On 23 November 2022, the UK government announced that it would not be proceeding with plans to introduce an intervention power that would have allowed the government to overrule financial regulators (known as a “call-in” power). The power was due to be included in the Financial Services and Markets Bill 2022–23 (discussed in our August 2022 Update), which is due to repeal EU rules over the British financial services industry and is being reviewed by the UK Parliament.
This announcement follows the UK government’s announcement, in September 2022, of its intention to introduce an “intervention power” that would allow the UK government to “make, amend, or revoke rules where there are matters of significant public interest.” The announcement had triggered significant pushback from financial regulators, including Bank of England and FCA chiefs, and lawmakers, mainly due to fears that the power would threaten financial regulators’ independence but also due to lack of clarity on what it would entail.
UK Transition Plan Taskforce publishes “best practice” climate transition plan guidance
On 8 November 2022, the UK Transition Plan Taskforce (TPT) published its draft disclosure framework for “best practice” climate transition plans by private sector firms. The sector-neutral disclosure framework is designed for FCA-regulated asset managers, FCA-regulated asset owners, and UK listed companies.
Under the ESG Sourcebook in the FCA Handbook, such entities will be required to make entity-level and product-level disclosures that are aligned with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) starting 2023. This involves a requirement to publish transition plans that consider the UK government’s net-zero commitment or provide an explanation if they have not done so (i.e., “comply or explain”).
As part of the UK’s move to making the publication of transition plans mandatory, HM Treasury launched the TPT in April 2022 to develop the “gold standard” for climate transition plans from UK financial institutions and corporates. The transition plan guidance builds directly on existing and emerging disclosure frameworks on climate and sustainability reporting from the TCFD and the International Sustainability Standards Board’s climate exposure draft.
The draft disclosure framework is open for public consultation until 28 February 2023. The FCA will be involved with the consultation process and intends to draw on the TPT’s work to strengthen transition plan disclosures and expectations of listed companies, asset managers, and regulated asset owners. The UK government has explained that it will take steps to incorporate transition plan standards into the UK’s forthcoming Sustainability Disclosure Requirements.
ESG ratings — FCA convenes green finance code of conduct data group
On 22 November 2022, the FCA announced the formation of an independent group to develop a voluntary code of conduct for ESG data and ratings providers.
The FCA has expressed its support for introducing regulatory oversight to promote greater transparency and trust in the ESG data and ratings market. Whilst the Treasury is considering this idea, the independent group will develop and encourage industry participants to follow the voluntary code of conduct.
The regulator explained that it intends for the code of conduct to be internationally consistent by taking into consideration the recommendations provided by the International Organization of Securities Commission (IOSCO), as well as developments in jurisdictions such as Japan and the EU.
Financial Reporting Council publishes annual review of stewardship reporting in relation to the UK Stewardship Code
The Financial Reporting Council (FRC) has published its “Review of Stewardship Reporting 2022” to set out its thoughts on reporting against the UK Stewardship Code. The review observed improvements in reporting in various areas, including the quality of activity and outcome reporting for engagement, collaboration, and escalation, contributions made to address market-wide and systemic risks, and how signatories monitor and hold third parties to account.
The FRC highlights that signatories to the UK Stewardship should strengthen efforts to report their activities and outcomes more effectively by using both quantitative and qualitative evidence. In particular, reporting should include multiple case studies to illustrate both the activities that are undertaken in the year and their outcomes.
The report noted that good examples of reporting disclosed examples of stewardship activity that spanned multiple years, such as significant involvement in collaborative initiatives. It encouraged signatories to provide updates on activities that were mentioned in previous reports to show ongoing engagement and any progress made.
The FRC further confirmed that it is in the process of reviewing the regulatory framework for stewardship with the FCA and the UK’s Department for Work and Pension. At present, the FRC is conducting research to understand how stakeholders use stewardship reporting and expects to publish a consultation on the Stewardship Code by late 2023.
Asset managers are reminded that the deadline for new and renewal applications, and re-applications from previously unsuccessful applicants, is 30 April 2023. In addition, please note that beginning 31 October 2023, the FRC will accept only renewal applications from existing signatories to facilitate focus on FRC’s review of the Stewardship Code.
FRC publishes annual review of corporate governance reporting in relation to the UK Corporate Governance Code
On 3 November 2022, the FRC published its Annual Review of Corporate Governance Reporting, which found an improvement in the quality of reporting against the UK Corporate Governance Code.
The report comprised 100 randomly chosen FTSE 350 and Small Cap companies. Whilst it observed improvements in reporting, the report also found that too few companies were providing meaningful explanations, particularly in relation to the outcomes and effects of governance policies and practices. The FRC also noted disappointment to see minimal disclosure about board engagement with major shareholders — with some companies simply stating that there had been meetings without providing further information on their engagement and its outcome.
The FRC will consult on a revision of the code next year, which will build on the information gathered from the report.
6. EU — AIFMD
Annex IV reporting — Netherlands
On 8 November 2022, the Dutch Authority for the Financial Markets (AFM) announced that the AIFMD periodic reporting obligation (Annex IV reporting) will also apply to non-EU AIFMs with effect from Q1 2023. This means that non-EU AIFMs will be obliged to submit their first reports in April 2023.
This announcement concerns non-EU AIFMs that have registered one or more alternative investment funds for marketing in the Netherlands under the Article 42 AIFMD national private placement regime as implemented in the Netherlands.
In addition, the AFM has noted that non-EU AIFMs will be subject to its Data Quality Engagement Framework review from 2024, in which the AFM reviews the data quality of submitted reports with the European Securities and Markets Authority (ESMA).
The AFM urges all non-EU AIFMs to create an AFM Portal account in the near future to prevent undesirable delays in reporting and to enable the AFM to email updates to them.
7. EU — ESG
ESAs call for evidence for better understanding of greenwashing
On 11 October 2022, the three European Supervisory Authorities (the European Banking Authority, European Insurance and Occupational Pensions Authority, and ESMA, together, the ESAs) published a “Call for Evidence on better understanding of greenwashing.”
The Call for Evidence was issued in the context of the May 2022 request by the European Commission for the ESAs’ input regarding greenwashing risks. The purpose of the Call for Evidence is to gather input from stakeholders on how to understand the key features, motives, and risks associated with greenwashing and to collect examples of potential greenwashing practices. The Call for Evidence is designed to gather input on potential greenwashing practices that are relevant to various segments of the sustainable investment value chain and of the financial product life cycle. The ESAs encourage respondents to provide examples of potential greenwashing practices not currently or explicitly covered by the EU sustainable finance legislation as well as examples of practices that may comply with the existing legislation but that still result in greenwashing.
All responses to the Call for Evidence should be submitted before 11 January 2023. Contributions to the Call for Evidence will feed into the ESAs’ findings for their progress reports due in May 2023; the ESAs will then publish their final reports prior to the May 2024 deadline.
ESMA publishes new Q&As on the SFDR and Regulatory Technical Standards
On 17 November 2022, ESMA published further Q&As to provide guidance on the SFDR and its Regulatory Technical Standards (RTS). The Q&As are extensive and cover the following areas:
1. Principal adverse impacts (PAIs): The ESAs clarified the following PAI-related points:
a. Short positions: Short positions should not be calculated separately from the main calculations.
b. Estimated data: It is good practice to disclose the proportion of investments for which the financial market participant (FMP) relied on data (i) obtained directly from investee companies and (ii) obtained by carrying out additional research.
c. Calculation dates for enterprise value: The quarterly impacts should be based on the current value of the investment, which should be derived from the valuation of the individual investment price (valued at fiscal year-end) multiplied by the quantity of investments held at the end of each quarter.
2. Financial product disclosures: The ESAs commented on several issues in the context of financial product disclosures:
a. Irrelevant sections: FMPs can remove any sections they deem not relevant in the disclosure templates only if those sections are accompanied by red text instructions that explicitly limit the scope of the section’s application.
b. Reference metrics: The use of reference metrics is not prescribed, but it could form part of good governance practices.
3. Designated index: The ESAs clarified that a designated index cannot be a broad market index.
4. Taxonomy-aligned investment disclosures: The ESAs provided the following guidance on investment disclosures aligned to the EU Taxonomy:
a. Green bonds: When calculating the proportion of taxonomy-aligned activities from green bonds, only the projects financed by green bonds should be considered (not the impact of the issuer as a whole).
b. PAI disclosures: When disclosing PAIs, FMPs could adjust the metrics to reflect that project financing bonds finance only specific activities, not the entire undertaking.
c. Pre-contractual disclosures and targets: Pre-contractual disclosures should only (i) include the minimum proportion that the financial product commits to meet and (ii) be based on the financial product’s actual investments; such disclosures should not include targets.
d. Financial products that do not make commitments: Article 8 SFDR financial products that do not commit to making sustainable investments need not disclose sustainable investments during the reference period.
To assist preparers of financial product disclosures under Article 8 SFDR regarding the minimum extent to which sustainable investments with an environmental objective are aligned to the EU Taxonomy, the ESAs also provided a non-exhaustive table that contains additional guidance.
ESMA launches consultation on guidelines for the use of ESG- or sustainability-related terms in funds’ names
On 18 November 2022, ESMA launched a consultation on the use of ESG- or sustainability-related terms in funds’ names. The regulator’s intentions are to ensure that ESG- or sustainability-related terms are supported in a material way by evidence of sustainability characteristics or objectives in a fund’s investment objectives and materials.
Under the proposed guidelines set out in its consultation paper, ESMA proposes to introduce the following:
- a minimum threshold of at least 80% of investments for the use of any ESG-related words, or impact-related words, in the name of the fund;
- an additional minimum threshold of at least 50% of minimum proportion of sustainable investments for the use of the word “sustainable,” or any other sustainability-related term, in the name of the fund;
- minimum safeguards based on the exclusion criteria, such as Commission Delegated Regulation (EU) 2020/1818 Article 12(1)-(2), for investment funds with an ESG-related term or sustainability-related term in their names;
- specific provisions for “transition” or “transition-related” fund names;
- a transitional period of six months from the date of the application of the guidelines for existing funds; and
- extending the naming-related provisions to closed-ended funds that have terminated their subscription period before the application date of the guidelines.
The consultation is open until 20 February 2023. ESMA intends to publish the finalised guidance on the ESMA website once the consultation is closed; the guidelines will become applicable three months after their publication on the ESMA website. Further, ESMA has suggested a six-month transitional period for funds launched prior to the application date to give them additional time to comply with the guidelines.
EU adopts corporate sustainability reporting legislation
On 28 November 2022, the EU Council announced its final approval of the Corporate Sustainability Reporting Directive (CSRD).
Non-EU companies with a significant presence in the EU, or with securities listed on an EU-regulated market, will become subject to sustainability disclosures as well as more detailed reporting requirements under a common framework of European Sustainability Reporting Standards (ESRS). The first set of draft ESRS was delivered to the European Commission on 28 November 2022 for its consideration and can be found here.
The CSRD legislation will be published in the Official Journal of the European Union after being signed by the Presidents of the EU Parliament and Council. It will enter into force 20 days later, and member states will be required to implement the new rules within 18 months.
For further details on the CSRD, see our Update EU Corporate Sustainability Reporting Directive — What Do UK and U.S. Headquartered Companies Need to Know?
8. International — Financial Stability Board
Financial Stability Board publishes progress report on enhancing resilience of non-bank financial institutions
On 10 November 2022, the Financial Stability Board (FSB) published a progress report to the G20 on enhancing the resilience of non-bank financial intermediation (NBFI). The report sets out policy proposals to address systemic risks in NBFI by reducing liquidity demand spikes, enhancing the resilience of liquidity supply in stress, and enhancing risk monitoring and the preparedness of authorities and market participants.
The report focuses on specific NBFI areas that may have contributed to the build-up of liquidity imbalances and their amplification in times of stress, such as open-ended funds, margining practices, bond market liquidity, and fragilities in USD cross-border funding. The policy proposals involve largely repurposing existing tools rather than creating new ones; however, the FSB will assess in due course whether such repurposing is sufficient.
Asset managers may wish to note that the report assesses the effectiveness of international policies to address liquidity risk and its management in open-ended funds. In particular, one set of policy proposals focuses on addressing structural liquidity mismatch in open-ended funds and promoting greater inclusion and use of liquidity management tools, including by developing detailed guidance on the design and use of those tools.
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