UK/EU Investment Management Update (June 2026)

In this Sidley Update, we cover, on the UK side, the Financial Services and Markets Bill 2026-27, the latest Financial Services Regulatory Initiatives Grid, Financial Conduct Authority (FCA) developments affecting investment firms, including proposed changes to registration requirements for authorised fund assets, findings from the FCA’s review of sanctions systems and controls, and the commencement of the new UK short selling regime. We also cover UK developments on tokenisation, private markets, artificial intelligence, climate-related disclosures, and cryptoassets.

On the EU side, we cover European Securities and Markets Authority (ESMA) developments under the Alternative Investment Fund Managers Directive (AIFMD), the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, and the Markets in Financial Instruments Directive (MiFID II), including ESMA’s report on compliance and internal audit functions of fund managers, updates to the MiFID II transparency manual, new MiFID II research payment provisions, and ESMA’s findings on MiFID II sustainability requirements. We also cover EU developments on cryptoassets, anti-money-laundering, and operational resilience. Finally, we cover the report by the European Central Bank (ECB) on non-bank financial intermediation and the report by the Financial Stability Board (FSB) on vulnerabilities in private credit.

1. UK — General

2. UK — Alternative Investment Funds 

3. UK — Sanctions

4. UK — Tokenisation

5. UK — AI

6. UK — AML (Cryptoassets Regime)

7. UK — ESG

8. UK — Short Selling

9. UK — Private Markets

10. EU — AIFMD/UCITS

11. EU — MiFID

12. EU — ESG

13. EU — MiCA

14. EU — Anti-Money-Laundering

15. EU — DORA

16. EU — Non-Bank Financial Intermediation

17. International — Private Credit

• Shorter deadlines for FCA and Prudential Regulation Authority (PRA) regulatory applications. Reducing the statutory deadline for applications for new firm authorisations and variations of permission from six months to four months; the deadline for incomplete applications from 12 months to 10 months; and the statutory deadline for Senior Managers and Certification Regime (SMCR) approved-person applications from three months to two months.

• SMCR. Introducing measures to enable financial services regulators to operate the regime in a more flexible manner, by (amongst other things) allowing regulators to create a notification-only route for certain senior manager appointments; removing statutory requirements for statements of responsibilities; and enabling firms to request conditional or time-limited senior manager approvals.

• Improved operational effectiveness of financial services regulators. Reducing procedural and administrative requirements for regulators by permitting the regulators to decline public consultations where the changes to the relevant rules have no or minimal cost impact.

• Provisional licence authorisation. Providing the legislative infrastructure for a provisional licence authorisation regime for early-stage financial services firms seeking FCA authorisation.

• Payment Systems Regulator brought within the FCA. Abolishing the Payment Systems Regulator and replacing the existing payment systems regulatory framework with a new framework under the FCA.

• Overseas recognition regimes. Giving HM Treasury (HMT) broader powers to create overseas recognition regimes where they provide for similar outcomes to the UK’s.

• Appointed representative (AR) regime reform. Bringing ARs within scope of the SMCR framework and creating a dedicated AR senior management function in principal firms.

The final scope and timing of the Bill’s implementation will depend on the parliamentary process and any amendments made to the proposed legislation. 

FCA publishes its latest Regulatory Initiatives Grid

On 19 May 2026, the Financial Services Regulatory Initiatives Forum published its latest Regulatory Initiatives Grid, which sets out the UK regulatory pipeline for the next two years.

Key initiatives for asset managers and investment firms include:

• Asset manager and fund reporting. The FCA plans to consult in Q3 2026 on a new reporting regime, including draft rules covering authorised and unauthorised funds, to address data gaps and improve reporting experiences for firms. 

• UK Alternative Investment Fund Manager (AIFM) Regulatory Framework. HMT and the FCA are progressing the replacement of the UK AIFMD with a more streamlined UK framework, including consideration of AIFMs’ prudential requirements. A draft statutory instrument and consultation paper are due to be published around mid-2026. This follows HMT’s 2025 consultation and the FCA’s 2025 Call for Input on the future regulation of AIFMs, which we discussed in our May 2025 Update.

• Investment Firms Prudential Regime (IFPR). The FCA plans to review the IFPR, with a call for input expected later in 2026 and a consultation paper in 2027. The FCA will also consult later in 2026 on its solo remuneration rules, covering the AIFM Remuneration Code, UCITS, and Prudential Sourcebook for MiFID Investment Firms (MIFIDPRU) remuneration codes. 

• Wholesale financial markets and reporting. The FCA and the Bank of England (BoE) are progressing a wider reporting harmonisation review across UK MiFIR, UK European Market Infrastructure Regulation (EMIR), and UK Securities Financing Transactions Regulation reporting regimes, which is expected to launch in Q3 2026. This review aims to create a more efficient framework that reduces unnecessary duplication.

• Financial Crime Guide. The FCA intends to publish a consultation paper on updates to the Financial Crime Guide in September or October 2026, which will include new guidance and refreshed content. 

2. UK — Alternative Investment Funds

FCA consults on registration of authorised fund assets

On 21 May 2026, the FCA published Consultation Paper CP26/16 on the registration of authorised fund assets. The consultation is of particular relevance to authorised funds that are also alternative investment funds (AIFs) under the UK implementation of the AIFMD (authorised AIFs).

The FCA proposes changes to enable depositaries of authorised AIFs managed by full-scope AIFMs to delegate certain asset registration and custody functions. The stated aim of the consultation is to support investment by UK authorised AIFs in private market assets whilst maintaining investor protection.

The proposals respond to concerns that under the current regime, depositaries may be required to hold legal title to certain private market assets, including UK commercial real estate and interests in some partnership vehicles, despite not managing those assets or making the relevant investment decisions. The FCA notes that this can expose depositaries to legal, financial, and reputational risks and may make some depositaries unwilling to continue servicing funds investing in those assets.

The FCA proposes to permit delegation of the Collective Investment Schemes Sourcebook registration function for certain non-custodial private market assets, subject to safeguards. For assets such as immovables and partnerships that are not collective investment schemes, delegation would be limited to an affiliate of the authorised fund manager.

The consultation closes on 9 July 2026. 

3. UK — Sanctions

FCA publishes report on review of sanctions systems and controls

On 28 May 2026, the FCA published a report setting out its findings from a recent review on firms’ sanctions systems and controls, in which it has assessed more than 150 supervised firms since February 2022. The FCA published a report on the same topic in 2023, which we discussed in our October 2023 Update. Since then, the FCA notes, UK sanctions regimes have grown significantly in scale and complexity, with the value of frozen assets reported in the UK increasing from £24.4bn in 2023/2024 to £37bn in 2024/2025.

Key themes include the need for stronger governance and oversight, improved sanctions management information, effective due diligence, and robust screening arrangements. Common weaknesses include outdated policies; insufficient oversight of group or outsourced arrangements; poor data quality; delays or errors in alert handling; and inadequate consideration of sanctions risks across complex ownership structures, intermediaries, and high-risk jurisdictions.

Money laundering reporting officers and compliance teams may find the examples of both good and poor practice constructive when reviewing their sanctions systems and controls.

4. UK — Tokenisation

FCA and BoE publish call for input on tokenisation in UK wholesale markets

On 18 May 2026, the FCA and the BoE published a joint call for input setting out their shared vision for the adoption of tokenisation in UK wholesale financial markets. The paper focuses on tokenised securities, including bonds, equities, and fund units, and seeks views from firms across the wholesale market ecosystem. The FCA and BoE state that tokenisation could support operational efficiencies, improved liquidity, risk reduction, and enhanced transparency but emphasise that adoption should preserve market integrity, financial stability, and consumer protection.

The proposed principles in the paper include ensuring that accountability for related regulated financial services activities is attributed to an identifiable regulated person, maintaining operational resilience and financial crime standards, supporting fair and orderly trading in tokenised securities, and anchoring settlement in central bank money. The authorities also indicate that tokenised and non-tokenised infrastructures should be able to coexist and interoperate and that regulatory treatment should generally depend on the risks and mitigants of the underlying activity or product rather than the technology used.

The call for input identifies priority areas for further work, including the regulatory regime for digital securities issuance and settlement, prudential and collateral treatment of tokenised assets, access to central bank money settlement, and support for HMT’s Digital Gilt Instrument pilot.

Feedback is requested by 3 July 2026 and will inform a final cross-authority roadmap expected later in 2026 and a consultation in 2027.

5. UK — AI

FCA, BoE, and HMT issue joint statement on frontier AI cyber risks

On 15 May 2026, the FCA, BoE, and HMT published a joint statement on the cyber resilience implications of frontier AI models for regulated firms and financial market infrastructures.

The statement notes that the cyber capabilities of current frontier AI models already exceed what skilled practitioners could achieve, and at greater speed, greater scale, and lower cost. The authorities warn that if used maliciously, these capabilities may amplify cyber threats to firms’ safety and soundness, customers, market integrity, and financial stability, particularly for firms that have underinvested in core cybersecurity fundamentals.

The authorities state that firms should take active steps to plan for and mitigate AI-related cyber risks, in line with existing operational resilience rules and expectations. Areas of focus include board and senior management oversight, investment and resourcing decisions, and management of third-party and supply-chain exposures. Firms are also encouraged to consider automated and AI-enabled cyber defences.

FCA seeks views on AI good and poor practice

On 14 May 2026, the FCA reopened its AI Input Zone, seeking views and practical examples of good and poor practice in relation to AI use cases in UK financial services. The AI Input Zone forms part of the FCA’s AI Lab and is intended to support safe and responsible innovation and promote growth and competitiveness. It also helps the FCA gain a practical understanding of how AI is being used in financial services.

The FCA is asking stakeholders to provide specific examples of what “good” looks like in safe and responsible AI development and what can be learned from poor practice. Examples do not need to be limited to financial services, provided they are relevant to firms seeking to deploy AI safely and responsibly, such as examples relating to effective governance processes for complex AI systems. The FCA expects to use the responses to inform a good and poor practice publication on AI later in 2026.

Responses are requested by 19 June 2026.

6. UK — AML (Cryptoassets Regime) 

FCA publishes responses to firms’ questions on AML requirements under the new UK cryptoassets regime

On 3 June 2026, the FCA published responses to firms’ questions on the interaction between the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) and the forthcoming Financial Services and Markets Act 2000 (Cryptoassets) Regulations 2026 regime. The FCA confirmed that MLR registration will remain the route for firms wishing to provide in-scope cryptoasset services before the new regime commences in October 2027 but emphasised that there will be no automatic transition from MLR registration to authorisation under the new framework. Firms seeking to undertake regulated cryptoasset activities will need to obtain FCA authorisation, with applications opening on 30 September 2026.

The FCA notes that authorisation assessments will extend beyond the requirements of the MLRs and will include broader consideration of firms’ governance, systems and controls, resources, and operational readiness. Firms are encouraged to begin assessing the impact of the new regime, identify the permissions they require, and undertake gap analyses against the proposed regulatory requirements.

The responses also set out the FCA’s expectations regarding financial crime controls and governance under the new regime. The guidance highlights the importance of robust governance arrangements; appropriately resourced AML functions; business-wide risk assessments; effective transaction monitoring and blockchain analytics; and oversight of sanctions, fraud, and operational resilience risks.

7. UK — ESG

FCA consults on simplifying climate reporting rules for investment products

On 5 June 2026, the FCA published its quarterly consultation, which contains its proposals to simplify climate reporting rules for investment products (amongst other topics). The current rules, which were introduced in 2021, are based on the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations.

The FCA’s objective is to introduce more proportionate product-level climate reporting requirements following industry feedback that complex product-level reports are not widely used by investors. Stakeholders also commented that the cost impact of producing reports puts UK firms at a disadvantage to their international peers who are not subject to the same requirements.

The proposals would remove the current product-level TCFD reporting requirements and replace the rules with fewer, more targeted requirements. For institutional clients, firms would need to provide, on request, at least Scope 1, 2, and 3 greenhouse gas emissions data where the client needs that information to meet its own climate disclosure obligations. Such requests would be limited to once per calendar year per product.

The FCA has said it will continue to explore streamlining entity-level rules, but those are not part of these proposals.

Feedback on the consultation is sought by 13 July 2026.

8. UK — Short Selling

UK government publishes commencement regulations for new short selling regime

On 3 June 2026, the Financial Services and Markets Act 2023 (Commencement No. 14) Regulations 2026 were published. The regulations bring into force the revocation of the existing UK Short Selling Regulation and other provisions related to the retained EU law.

The regulations pave the way for the commencement of the UK’s new short selling framework, which will take effect on 13 July 2026. For further information on the new regime, please see our Update New UK Short Selling Regime — Analysis of Final Rules.

9. UK — Private Markets

FCA speech on confidence in private markets

On 11 May 2026, the FCA published a speech by Sarah Pritchard, FCA deputy chief executive, delivered at the Investment Association Private Markets Summit 2026. The speech focused on the growing importance of private markets to the UK financial system and the need for confidence to be supported by strong firm-level controls, proportionate regulation, and oversight.

The FCA noted that UK private markets are approaching £1.2 trillion in assets under management, with private capital investing £25 billion in more than 1,400 UK businesses last year. It also highlighted growth in long-term asset funds, noting that assets under management had increased from £5 billion to £7.5 billion in less than a year.

Pritchard emphasised that market stress is not itself problematic where the system remains resilient but that conduct risks in private markets can harm investors, undermine market integrity, and damage trust.

The speech also signalled forthcoming reform of the UK regime for AIFMs. The FCA stated that alongside an expected HMT consultation later this year, it will set out proposals for a more proportionate regulatory approach, reducing obligations on smaller funds while requiring more from larger funds where appropriate to their size and market impact. The FCA encouraged firms to engage early before proposals are finalised.

10. EU — AIFMD/UCITS

ESMA publishes report on compliance and internal audit functions of fund managers

On 11 May 2026, ESMA published a final report setting out the results of its 2025 common supervisory action (CSA) with national competent authorities (NCAs) on the compliance and internal audit functions of UCITS management companies and AIFMs. ESMA carried out the CSA to assess, foster, and enforce adherence by supervised entities to the AIFMD and UCITS requirements relating to compliance and internal audit functions, including whether those functions had adequate staffing, authority, knowledge, and expertise.

ESMA found that most fund managers complied with the relevant requirements under the AIFMD and UCITS frameworks. However, the review identified areas for improvement, including the independence of control functions, the quality and implementation of internal policies and procedures, and the way senior management and boards exercise oversight.

Compliance weaknesses included insufficiently robust compliance risk assessments, inadequate or inconsistently applied compliance monitoring plans, incomplete internal reporting to senior management or boards, and insufficient follow-up of compliance deficiencies.

The CSA also identified weaknesses in internal audit reporting, risk-based planning, documentation, and follow-up mechanisms for internal audits.

The report indicates potential areas of future supervisory focus for NCAs, and ESMA has stated that it will continue to promote exchanges among NCAs on this topic.

11. EU — MiFID

ESMA updates manual on MiFID II / Markets in Financial Instruments Regulation (MiFIR) transparency

On 12 May 2026, ESMA published an updated version of its manual on pre-trade and post-trade transparency under MiFID II/ MiFIR. The manual is a convergence tool designed to promote common supervisory practices in relation to pre-trade and post-trade transparency, reporting to the consolidated tape provider, and transparency calculations.

The May 2026 update includes new guidance on the removal of free-float from the liquidity assessment of shares and related guidance; the liquidity of bonds issued by the European Investment Bank, the European Stability Mechanism, and the European Financial Stability Facility; and the meaning of “end of day” for post-trade deferrals and size thresholds for bonds.

Regulatory technical standard (RTS) amending MiFID II research provisions published in Official Journal

On 3 June 2026, Commission Delegated Directive (EU) 2026/374 amending MiFID II research provisions was published in the Official Journal. We covered the consultation phase for the RTS in our December 2025 Update.

The RTS is designed to give investment firms greater flexibility in payment methods for execution services and research under the MiFID II Delegated Directive (EU) 2017/593. It also imposes new operational and disclosure requirements in relation to payment for research and execution services.

The RTS enters into force on 21 June 2026.

12. EU — ESG

ESMA publishes results of CSA on MiFID II sustainability aspects

On 6 May 2026, ESMA issued a statement on the results of its CSA with NCAs on the integration of sustainability requirements into firms’ MiFID II suitability assessment and product governance processes. We covered the launch of the CSA in our October 2023 Update.

Firms providing investment advice or portfolio management under MiFID II are required to account for clients’ sustainability preferences and objectives in their suitability assessments and product governance and target market assessments. The CSA was conducted throughout 2024 and 2025 and assessed how a sample of firms have implemented these sustainability requirements as well as the related MiFID II guidelines on suitability and product governance.

The statement highlights areas for improvement, including the following:

• The clarity and granularity of sustainability-preference questionnaires;
• The treatment of multiple sustainability preferences;
• The consistency of procedures for handling clients who do not express preferences; 
• The neutrality of the client engagement process; and
• Avoiding unnecessary re-collection of sustainability preferences where recent information is already available.

ESMA notes that the review of the Sustainable Finance Disclosure Regulation is expected to enhance the operation of the framework for sustainability‑related product disclosures, which will in turn require future updates to the MiFID II sustainability‑preference requirements.

13. EU — MiCA

European Commission (Commission) consults on review of MiCA

On 20 May 2026, the Commission launched a targeted consultation on the functioning of the EU’s regulatory framework for cryptoassets under the Markets in Cryptoassets Regulation (MiCA). The Commission is assessing whether MiCA remains fit for purpose in light of developments in cryptoasset markets and the global policy and regulatory landscape since MiCA came into force in 2024.

The targeted consultation seeks views on the main building blocks of MiCA. It covers a broad range of topics, including the following:

Scope and classification. The consultation asks whether the scope of MiCA remains appropriate, including whether the boundary between cryptoassets regulated under MiCA and financial instruments regulated under existing legislation is sufficiently clear.

Stablecoins. The consultation considers the operation of MiCA’s regime for asset-referenced tokens and e-money tokens, including their potential role in payments, settlement, and tokenised markets. It also seeks feedback on whether the current prudential, reserve, redemption, and significance requirements remain appropriately adjusted, particularly in light of global stablecoin arrangements and third-country regulatory frameworks.

Cryptoasset service providers. The consultation asks whether the current regime for cryptoasset service providers (CASPs) remains adequate, including whether the list of regulated services is sufficiently comprehensive, whether prudential requirements are proportionate, whether there should be additional oversight and coordination within multi-function groups, and whether CASPs should be subject to reporting requirements under MiCA.

The consultation also seeks feedback on decentralised finance, staking, lending and borrowing, non-fungible tokens, prediction markets, perpetual futures, tokenised deposits, and the private law treatment of tokens, including issues relating to ownership, transfer, custody, insolvency, and conflicts of law.

The consultation closes on 31 August 2026. Feedback will be used to prepare a report that will inform the Commission’s future policy work on digital assets and (if necessary) future legislative proposals to amend MiCA.

14. EU — Anti-Money-Laundering

AMLA consults on draft guidelines on ongoing monitoring of business relationships

On 3 June 2026, the EU Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA) published a consultation on its draft guidelines on ongoing monitoring of business relationships.

The purpose of the guidelines is to support in-scope entities in implementing their ongoing and transaction monitoring duties under Regulation (EU) 2024/1624 (the EU’s Anti-Money Laundering Regulation). The draft guidelines outline expectations on maintaining customer documentation and keeping records up to date, including through periodic and event-driven reviews. They also address the sources of information that may be used for those purposes and include guidance on the design and operation of monitoring frameworks, including the use of manual, automated, or semi-automated processes and controls, and analytical tools.

The consultation closes on 3 September 2026.

15. EU — DORA

European Supervisory Authorities (ESAs) publish joint report on major information and communication technology (ICT)–related incidents

On 3 June 2026, the ESAs published their first report on major incidents relating to ICT. The report analyses major ICT-related incidents reported by EU financial entities during 2025, the first year of application for incident reporting under the Digital Operational Resilience Act (DORA).

A “major” ICT incident is one that has a high adverse impact on the network and information systems supporting a financial entity’s critical or important functions. The ESAs report that 3,383 major ICT-related incidents were reported across the EU financial sector in 2025. Systems and controls failures were the main drivers of major incidents, with almost one-third of incidents being attributable to third-party risk management and outsourcing arrangements. The report identified a low frequency of reported incidents related to cybersecurity, suggesting that existing security safeguards are generally functioning effectively. However, the ESAs warn that the use of increasingly sophisticated AI-driven tools may in future pose challenges to cybersecurity, reinforcing the need to maintain high cybersecurity standards.

16. EU — Non-Bank Financial Intermediation

European Central Bank report on need for stronger macroprudential framework for non-bank finance

In May 2026, the ECB published a report by the Eurosystem Financial Stability Committee high-level task force on non-bank financial intermediation (NBFI), setting out targeted proposals and a medium-term roadmap to strengthen the macroprudential framework for the NBFI sector. The report builds on the Eurosystem November 2024 response to the Commission consultation on macroprudential policies for NBFI and is intended to inform the Commission’s ongoing work in this area, including where legislative changes may be required.

The report states that the NBFI sector can potentially amplify shocks where leverage, liquidity mismatches, and interconnectedness are not adequately addressed. It cites recent market stress episodes as evidence of these risks, including the March 2020 “dash for cash” (when investors’ demand for liquidity led to widespread selling and stress in core markets) and the 2022 UK gilt market crisis (when leveraged liability-driven investment strategies used by pension funds contributed to forced selling and disruption in the gilt market).

The ECB emphasised the need for enhanced data access and sharing between EU authorities and central banks, improved system-wide stress testing, and additional macroprudential tools for investment funds. The report also calls for stronger coordination powers at EU level, including a greater role for ESMA and the European Systemic Risk Board in overseeing cross-border risks in the NBFI sector.

The report is directed principally at EU policymakers and authorities involved in developing the NBFI macroprudential framework. It notes that some proposals would require EU legislative change, while others should be progressed through supervisory coordination, international work, and a broader medium-term roadmap covering data strategy, risk assessment and surveillance, policy tools, and evaluation of future interventions.

17. International — Private Credit

Financial Stability Board  publishes report on vulnerabilities in private credit

On 6 May 2026, the FSB published a report on vulnerabilities in private credit. The report assesses the financial stability implications of the growth of private credit and the increasing interconnections between private credit funds, banks, insurers, and private equity sponsors. Although the report does not make any formal recommendations or set new policy standards, it reflects a continued international supervisory focus on the private credit sector.

In particular, the FSB notes that private credit remains untested by a prolonged economic downturn. Whilst it can support financing for borrowers who may not have ready access to public markets or bank lending, the sector presents monitoring challenges because borrowers are often unrated, data is limited, valuation practices are complex, and fund structures differ significantly. The FSB identifies vulnerabilities relating to deepening interconnections with other parts of the financial system, potential liquidity mismatches, borrower leverage and credit quality, reliance on private valuations and ratings, and the risk that stress could spread through interconnected institutions.

Looking ahead, the FSB has said that it will focus on four areas:

• Assessing vulnerabilities from interlinkages and liquidity mismatches;
• Mapping and defining the private credit ecosystem;
• Supporting supervisory discussions; and
• Addressing data challenges to improve monitoring and risk assessment.