FCA Contemplates Revising Asset Management Regulatory Framework

The UK Financial Conduct Authority (FCA) is seeking industry feedback in a discussion paper (DP)¹ on potential regulatory reform of the asset management sector. If enacted, the UK Government’s Future Regulatory Framework proposal² could see retained EU law replaced with UK-specific rules under the FCA’s oversight, tailored for the UK asset managers. The FCA has called for views on the issues it has identified and its high-level proposals. The DP excludes discussion on a number of items, including the senior managers and certification regime, prudential requirements, pre-contractual disclosure and transaction-related disclosure and reporting requirements. In this alert, we set out a summary of the key elements of the proposals.

Harmonising the regulatory framework applicable to asset managers

The existing UK asset management regulatory framework consists of separate pieces of EU legislation, enacted and amended at different times. This has created an at times incoherent regime, meaning asset managers are required to comply with different rules in some key areas, e.g. general organisational requirements, conflicts of interest and outsourcing arrangements. The FCA contemplates, and invites feedback on the following proposals, among others. 

• Single rulebook for asset managers. Creating a single rulebook for asset managers. This may provide a more effective framework going forward, but could create disruption and significant one-off costs for many firms and other stakeholders.
• Redrawing the boundaries for retail funds. The FCA proposes new retail fund categories, possibly removing the NURS/UCITS distinction, and expanding retail access to more complex or less liquid fund vehicles.
• Revising regulatory regime for managers of professional funds. The FCA may consider simplifying rules where investors are professional investors only, and calibrate rules to the strategy and size of the manager. This may mean extending the availability of the small AIFM regime, possibly strengthening the disclosure requirements applicable to small AIFMs, and reviewing or removing the registered small AIFM regime.

Enhancements to regulatory regime

The FCA proposals focus on the following areas:

• More clearly defined responsibilities for portfolio managers providing services to authorised fund managers (AFMs)³, including potentially mandatory minimum contractual terms; possibly industry best practice guidance on portfolio managers’ duties.
• Enhanced liquidity management – the FCA may mandate compliance with the liquidity stress testing guidelines issued by the European Securities and Markets Authority (ESMA), and extend the scope of liquidity reporting requirements.
• Clarification of rules applying to swing pricing and other anti-dilution mechanisms to achieve greater consistency in how [asset?] managers construe the rules.
• Clarifying rules for depositaries. The FCA proposes to review and clarify rules applicable to depositaries chiefly to ensure alignment of regulatory expectations and depositaries’ operating practices, but also to remove superfluous oversight duties.
• Such clarifications of depositary rules would include (among other items)
  • oversight of AFM’s liquidity management, including stress testing;
  • appropriate systems and controls and actions expected of a depositary when a breach of rules or constituent documents of the fund has been identified; and
  • course of action by the depositary if the manager does not address the breach.
• Guidance on the application of the 10% rule and eligible assets requirements to UCITS, and potentially relaxing some prescriptive risk spreading requirements (including the UCITS 5/10/40 rule).       

Technology and innovation; investor engagement

The FCA is also inviting views on proposals to amend rules to support the use of technology to facilitate more efficient operating models. The proposals include questions relating to, for example: direct dealing by consumers in authorised funds; fund tokenisation; tokenisation of portfolio assets.

The FCA’s proposals also set out questions on how to approach reviewing and revising asset manager reporting and disclosure requirements, taking into account technological advancements and the relative flexibility and cost-efficiency of digital reporting. The questions cover:

• Better use of technology to improve attendance and participation at unitholder meetings, including virtual meetings and straight-through processing of unitholder votes.
• Amendments to prospectus requirements to make the information more accessible and digestible to investors, including: making the prospectus more modular; altering content requirements to support clearer and easier segmentation; allowing incorporation by reference of standard text; and renaming the prospectus and requiring machine-readability.
• Making managers’ reporting (including portfolio holdings) more frequent and transparent.

Next steps

The FCA will ensure a wide range of stakeholder engagement, including forums, roundtables and policy sprints to enable wide participation in developing the proposals. The consultation period closes on 22 May 2023 and the FCA will revert with a summary of the responses later in the year. Akin Gump will continue to monitor and report on developments.